Buyers in today’s real estate market have to come to the closing table with more money than ever before.  When the market was great, there were so many programs that would help with a buyers down payment and closing costs.  These programs helped a buyer buy a home for almost nothing.  That is not possible today.

There are ways to help out a buyer that will reduce the amount of money needed to buy a home.  One way is a lender credit.  A lender credit is when the mortgage company raises the interest rate  from the current (par) interest rate to cover the amount of money you need to cover the remaining closing costs.

What are Closing Costs?

There are two parts to closing costs.

• Lender and Attorney Fees: These are fees charged to complete the loan and closing on home.

• Prepaid: Prepaid are the money that is needed to establish you escrow account.

An escrow account is an account where money is deposited every month.  This money is then used to pay property taxes, home owners insurance, and mortgage insurance (If you have it).  When a person makes their mortgage payment, it includes the money that will go into your escrow account each month.  The term commonly used is PITI.  PITI means Principle, Interest, Taxes, and Insurance.  These are the components of a mortgage payment.

Closing costs are a  negotiable item when buying a home.  Sellers can pay up to 6% in closing costs, but rarely do.  In Georgia, most times, you see 3% as the most a seller will pay.

Most seller paid closing costs can cover the mortgage company and attorney’s fees.  It usually will not be able to cover your prepaid.  This is where a lender credit can be used.

What is a Lender Credit?

When a buyer gets a lender credit, the interest rate will increase to cover the amount of closing costs needed. This will increase the mortgage payment some, but a buyer will not have to come up with the additional closing costs.  Take a look at the example below using my client.

Here is great example.  I have a fantastic client who is buying a home.  She has the down payment and the seller is providing 3% closing costs. That covers most of the closing costs but not all.  She still has $1,900 not covered by the seller.  She has to pay those. This is where a lender credit is needed to cover the remaining closing costs.

Lender Credit Example:

Purchase price:  $172,0000
Interest rate:  4.75%
Principle and interest payment:  $897.23

Lender credit:  $1900 in closing costs
Interest rate:  5%
Principle and interest payment:  $923.33

In order for my client to get a lender credit, the mortgage company increased her interest rate .25% to 5%.  By doing this, her payment increased $26.10 but she received $1,900 in closing costs as a lender credit.  This helped her get the house she wanted.

A lender credit is not exactly same every time.  There are factors that determine what and how much the lender credit will be.

Factors for a Lender Credit

• The current (par) interest rate for the day

• The mortgage company – each mortgage company charges differently for a lender credit

• The amount of closing costs needed

Depending on how much closing costs are needed effects how much the interest rate increase.  Obviously the more closing costs the larger the increase in the interest rate.