Mortgage Closing Costs: An Expenditure Item That Is Often Overlooked
When people negotiate a mortgage, they tend to focus on the interest rate, loan terms, refinancing options, and other aspects they will have to live with for decades to come. However, many borrowers (especially when they are novices in the field) often forget about closing costs – a mixture of various expenses and fees they will have to defray for processing, funding, and finalizing a property transaction. This is where a lender credit comes in handy.
A Lender Credit Explained
Closing costs may seem like a paltry expense compared with the huge sums involved in mortgage repayment. But in fact, they aren't some chump change. Closing costs may amount to up to 6% of the real estate's purchase price, which means you have to fork out thousands of dollars (sometimes as much as $20,000) of ready cash here and now. Needless to say, a person applying for a mortgage usually doesn't have that kind of money on hand. Knowing this, lenders lend a hand (forgive my pun) by offering a specialized credit.
A lender credit is a financial agreement according to which you pay only a fraction of closing costs. Most of them are covered by the lender itself. Of course, the agency doesn't give you a lump sum in cash to carry to the teller in person. Instead, you exchange the sum you should pay at the moment for the higher interest rate you will have to pay in the future.
What makes lender credit a convenient and fast option is that you don't need to submit special documents or go through any procedure to get it. This credit comes as part of the mortgage package at many agencies, so borrowers provide the standard set of documents when applying for a loan and, if they don’t have enough cash to close the deal, the lender offers a credit to this end.
You shouldn’t mix up a lender credit with other financial relief initiatives – a seller concession and a closing cost assistance program. As the name hints, a seller concession is the practice of covering part of closing costs by the former property owner (not the lender, as with a lender credit). A closing cost assistance program is financial aid extended by federal, state, or local governments, as well as by private or non-profit institutions (again, not the lender).
The Lender Credit’s Mechanics Dissected
While the term “lender credit” is typically used to describe the whole amount the lending agency pays as your closing costs, it often applies to the measurement units the sum is calculated in. To avoid confusion, we will call such units “negative points”, as many specialists in the domain do.
So, what is a negative point? As a rule, it equals 1% of the mortgage amount. The lender offers you up to nine negative points to cover your closing costs (the number depends on the occupancy type, the client's loan-to-value (LTV) ratio, and investor guidelines). Each point accepted by you translates into a 0.25% addition to the interest rate (it doesn’t have to be a whole number – fractions of points are also used). And vice versa. Each point you pay upfront lowers your interest rate by the same amount, so you'll spend less at the end of the day.
Let’s illustrate how the system works with an example.
You plan to buy a house costing $200,000. The lender gives you that money at 6.5% interest and announces the closing costs: $4,000. Since you have only $1,000 available right now, you ask for 1.5 negative points, which will cover the missing $3,000 of the upfront fees. The lender grants what you ask for; as a trade-off, your interest rate rises by 0.25% * 1.5 = 0.375% and will constitute 6.5% + 0.375% = 6.875%.
Apart from tricky calculations, you should realize one more thing: not all lenders provide this option. And if they do, they impose strict requirements on applicants. To qualify for a lender credit, you should make at least 20% of the down payment (in the hypothetical example described above, it is 25%), sport a minimum credit score of 700 (preferably 740+), and have no more than a 45% debt-to-income (DTI) ratio.
I strongly suspect that after reading all those details, numbers, calculations, and percentages, your head is in a tailspin. If so, it is best to consult seasoned professionals in the niche for competent advice.
How LBC Mortgage Can Help You
Does LBC Mortgage provide lender credits? It surely does. Our lending agency has been in the mortgage market for more than 18 years, during which we have done our best to streamline and facilitate our clients' efforts aimed at acquiring property. A lender credit is one of the key instruments that can bring the home-owning dream within easy reach.
Contact us to discover criteria for getting a lender credit and learn how it will affect your interest rate and the total amount you will have to pay. Our vetted experts will run the necessary calculations for your unique use case and help you choose the optimal solution with minimal expenditures involved.
What is a Lender Credit for: Summing It Up
A person who has received a mortgage is often cash-strapped, so paying closing costs is quite a challenge for them. Mortgage agencies offer these borrowers a lender credit to cover a greater part of these expenses. In exchange for assuming responsibility for the remaining closing costs, the lender increases the interest rate. Thus, a tradeoff for the lower upfront payment now is the greater overall amount paid down the line.
Shop around for a reliable agency that provides lender credits and discuss its details for your particular situation.