Many banks and mortgage lenders often offer borrowers lender credits to help pay for closing costs. Here we’ll discuss lender credits in more detail and how you can use these credits to reduce — or in some cases eliminate — reverse mortgage closing costs.
What is a lender credit?
Many mortgage lenders offer credits to help you pay for some or all of the closing costs associated with home loans. For example, a $200,000 home loan may incur closing costs of 3 to 6 percent of the loan amount.
Using the high end of 6 percent on a $200,000 home loan, the lender will require you to pay $12,000 in closing costs. Lender credits can help pay some or all of the $12,000.
How does a lender credit work?
Since closing costs can add thousands of dollars to the original loan amount, lender credits can help you if you don’t have the money to pay those additional costs at closing. However, the credits aren’t free, and lenders recoup the cost of the credits by increasing your initial interest rate.
Over the life of your home loan, you’ll pay a slightly higher monthly mortgage payment to cover the increase in the initial interest rate. The bottom line is the higher the lender credits, the higher the reverse mortgage rate. Rate increases for lender credits can range from 1/3 to ½ of a percent increase in the initial interest rate.
When is a lender credit beneficial?
All mortgage loan borrowers have their own unique financial situation. Some can afford to pay all the costs at closing, and some don’t have the budget to pay for thousands of dollars in reverse mortgage costs.
If you fall in the latter category, lender credits can be highly beneficial. If you’re working from a razor-thin budget, lender credits can open up some room to save money at closing. For example, if you’re buying a home and most of your cash reserves are tied up in the down payment with little left for closing costs, lender credits can help relieve that burden.
Fortunately, you can negotiate credits with your lender. Rules for lender credits aren’t universal in the mortgage industry, so you can get lenders to pay more in closing costs for a smaller increase in your interest rate.
What can lender credits be used for?
You can use lender credits to pay for any costs or fees lenders or third parties charge to finalize your home loan.
Examples include but are not limited to:
- Loan origination fees
- Appraisal fees
- Settlement fees
- Title insurance
- Prepaid taxes
- Escrow fees
Lender credit limitations
Unfortunately, you can’t use lender credits for items such as a down payment, cash reserve requirements or minimum contribution requirements. However, if you use lender credits responsibly, you can free up any additional money you may need for a down payment or reduce/eliminate the cash you’ll need to close your loan.