With average closing costs ranging from 2 to 5 percent of a home's purchase price, gathering the funds for closing on top of a down payment can be a major hurdle for first-time homebuyers. This is where lender credits come into play.
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If a borrower doesn't have enough cash for closing costs, a lender can grant a credit to cover all or some of their closing costs. A lender can offer a flat rate lender credit that specifies a certain amount they will contribute to closing or a no-closing cost credit which will vary based on the amount of coverage needed.
When a borrower receives a lender credit, this typically means they will eventually be paying for closing costs, just not upfront. When a lender agrees to credit closing costs, it is usually at the price of a slightly higher interest rate so the costs will be paid back by the borrower over the life of the loan.
Following the new TRID disclosure laws enacted in October 2015, borrowers receive loan estimate disclosures which include any granted lender credits with an estimated cash-to-close.
Lender credits can be extremely beneficial for a variety of borrowers from those with little available funds for closing to homebuyers who need the reserves they do have to finance other items for their new home.
If you have any questions about lender credits, feel free to reach out to one of our mortgage bankers. For more information about home buying and financing, in general, download our free Mortgage 101 Handbook.