What are mortgage lender credits?

You can potentially pay less upfront for your home purchase

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Saving up to buy a house can be challenging, especially as housing prices continue to rise across the country. However, mortgage lender credits may ease some of the burden by rolling the closing costs of your home purchase into your loan. In exchange, your lender charges a higher interest rate on your mortgage.

While lender credits aren’t right for everyone, they may help you buy a home sooner and free up some cash to put toward your down payment or emergency savings.


Key insights

With mortgage lender credits, you can include closing costs in your home loan instead of paying them upfront.

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The lender charges a higher interest rate on your mortgage in exchange for covering closing costs, which may result in higher monthly payments and paying more overall.

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Mortgage lender credits are ideal for home buyers who are tight on cash or planning to move or refinance in a few years.

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How do mortgage lender credits work?

When you buy a house, there are closing costs. These are fees and expenses associated with finalizing your mortgage. Closing costs generally include the lender’s origination fee, title insurance, home appraisal and inspections.

Average closing costs are usually between 2% to 5% of your loan amount. Since many lenders typically require a down payment of at least 5%, closing costs can present another obstacle to homeownership.

If you’re struggling to produce the cash upfront, your lender may cover the closing costs for you if they offer mortgage credits. However, accepting credits means the lender can increase your loan’s interest rate (the percentage they charge you for borrowing money to buy your home). How mortgage rates are determined varies from lender to lender, but typically, the more credits you take, the higher your rate will be.

Lender points vs. credits

While mortgage lender credits allow you to pay less upfront in exchange for a higher interest rate, lender (discount) points are the opposite.

With lender points, you pay more upfront to secure a lower interest rate. Contrary to lender credits — which are better if you plan to sell or refinance your home in a few years — discount points are typically better for those staying in their home long-term because they’re more likely to reap the benefits of a lower rate.

However, lender points are usually only ideal if you have a sufficient down payment or emergency fund. If you’re interested in paying more upfront to receive a temporarily lower interest rate, a mortgage rate buydown may also be worth considering.

» MORE: Mortgage APR vs. interest rates

How to qualify for mortgage lender credits

Similar to getting a mortgage, qualifications for obtaining credits vary among different lenders. You can ask the loan officer if they offer credits, how much they are and how to get approved.

Lenders may use the following criteria to determine eligibility for lender credits:

  • Credit score: Your credit score can show your level of financial responsibility. A lender may be more willing to offer mortgage credits if you have a good or excellent credit score (670 or higher).
  • Employment: Lenders can look at your employment history to determine the stability of your income. A consistent job history may make you a more attractive borrower.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) is your monthly payments on debt divided by your monthly gross income. If your ratio is above 36%, you may have more difficulty qualifying for mortgage credits.

Pros and cons of using mortgage lender credits

Mortgage lender credits can be a great way to buy a home sooner so you can start building equity. With lender credits, you have fewer upfront costs to worry about when buying a home. It may be an excellent avenue if you’re short on cash or don’t want to dip into your savings. However, if you accept mortgage credits, the lender will likely raise the interest rate of your loan. It could mean paying thousands of extra dollars in interest throughout the life of your mortgage.

Weigh the pros and cons of using mortgage lender credits to see if this option is best for your homebuying journey.

Pros

  • Pay less upfront
  • Make a bigger down payment
  • Good for the short term

Cons

  • Higher interest rate
  • Larger monthly payments
  • Stricter qualifications

» COMPARE: Types of mortgage loans

Are mortgage lender credits worth it?

Homeownership may be a more attainable goal without the burden of closing costs.

“The perfect situation when a lender credit is most useful is when you don't have enough cash for a home down payment,” said Eric Croak, a certified financial planner and president of Croak Capital. “It can provide a bit more room in your budget, sometimes a few thousand dollars.”

However, lender credits may be even more beneficial if you plan to move or refinance in a few years. “If you don't plan to stay in the house for a long time or if you're thinking of refinancing soon after buying, then getting lender credit is a smarter choice," Croak explained.

By the time you move or refinance, you may have paid less in extra interest than you would have for closing costs. However, it’s important to note that there are also closing costs when refinancing a home, though you may be able to opt for a no-closing cost refinance.

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    FAQ

    What is the average mortgage lender credit amount?

    One lender credit is worth $1,000 toward closing costs. You can find the credits listed on your loan estimate or closing disclosure.

    Can mortgage lender credits be applied to any type of mortgage loan?

    Lenders can apply mortgage credits to various types of mortgage loans; some may even provide them for FHA closing costs. However, not all lenders offer mortgage credits, and terms and conditions can vary.

    Are mortgage lender credits tax deductible?

    Unlike discount points, mortgage lender credits are not tax deductible because the lender is shouldering the closing costs. However, you may be able to deduct some of your mortgage’s interest each year.

    Bottom line

    It can be difficult to save money for a house, but mortgage lender credits may make it easier by helping cover the closing costs.

    Although you’ll face a higher interest rate on your loan, lender credits can eliminate some of the upfront costs of purchasing a home. You can then allocate more money toward your down payment or emergency fund.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Redfin, “United States Housing Market.” Accessed Feb. 29, 2024.
    2. Consumer Financial Protection Bureau, “Determine your Down Payment.” Accessed Feb. 29, 2024.
    3. Equifax, “What is a Good Credit Score?” Accessed Feb. 29, 2024.
    4. Michigan.gov, “Qualifying for a Mortgage.” Accessed Feb. 29, 2024.
    5. Consumer Financial Protection Bureau, “How should I use lender credits and points (also called discount points)?” Accessed Feb. 29, 2024.
    6. IRS, “Publication 936 (2023), Home Mortgage Interest Deduction.” Accessed Feb. 29, 2024.
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