Lender Credit: What It Is and When It Makes Sense
When you’re buying a home, covering upfront costs can be a challenge, and that’s where lender credits can help. A lender credit is money your lender gives you to offset some (or all) of your closing costs. In return, you agree to a slightly higher mortgage interest rate. It’s a trade-off — you’ll pay less upfront, but more over time through higher monthly payments.
Lender credits are often used in no-closing-cost mortgages, and they can be a good option in certain situations. But whether it’s right for you will depend on your budget and long-term plans.
How lender credits work
Lender credits allow borrowers to reduce their upfront closing costs, often used in a no-closing-cost mortgage. In exchange, the lender charges a higher mortgage rate — this means you’ll pay less at closing, but more over the life of your loan.
The credits are usually expressed as negative points, where a certain dollar amount represents one point. For example, a $1,500 credit on a $150,000 loan is one negative point. And if your total closing costs bill is $6,000, applying a $1,500 lender credit would reduce that amount to $4,500.
Your lender credit amount depends on the interest rate you choose, as well as housing market conditions. The higher the rate, the more credit the lender can offer. Each lender sets its own terms, so the credit can vary from one lender to another.
You can review these credits on your loan estimate or closing disclosure.
Lender credit example
The example below shows how a lender credit might affect both your closing costs and monthly mortgage payments if you were to take out a $450,000 loan with a 20% down payment and owe $13,500 in closing costs. We’ll assume that your lender will apply 2% of your loan amount ($9,000) toward closing costs for every quarter-percentage-point increase in your interest rate.
| Credit amount | Mortgage rate | Closing costs | Monthly P&I payment | Total interest paid | |
|---|---|---|---|---|---|
| No lender credit | N/A | 6.75% | $13,500 | $2,334.95 | $480,583.13 |
| With lender credit | $9,000 | 7% | $4,500 | $2,395.09 | $502,232.03 |
With a $9,000 lender credit, upfront closing costs drop from $13,500 to $4,500, making it easier to cover out-of-pocket expenses at closing. However, the higher interest rate increases the monthly mortgage payment by about $60. Over the life of a 30-year mortgage, this adds up to roughly $21,649 more in total interest compared to a loan without the lender credit.
Lender credit vs. discount point: What’s the difference?
| Lender credit | Discount point |
|---|---|
|
|
Lender credits and discount points (which are also known as mortgage points) work in opposite ways. With discount points, you pay money upfront to reduce your interest rate and lower your monthly payments. With lender credits, the lender pays a portion of your closing costs, but your interest rate and monthly payments are higher over the long term.
Lender credits could be a good choice if you plan to stay in your home for a few years or want to save cash for a future refinance. However, discount points would be better if you plan to stay long-term and can afford higher upfront costs to save on interest over the life of your loan.
Can I negotiate a lender credit?
Lender credits vary from lender to lender, and will also depend on your chosen loan program and overall mortgage market conditions. Because there’s no specific formula for tying interest rates to lender credits, you should shop for a mortgage with three to five lenders to see which offers the most in credit for the lowest rate.
Here are some negotiation tips for homebuyers interested in lender credits:
- Use competing offers to get a better deal: Show your preferred lender the lower-cost offers from competitors and ask if they can match or beat those terms. Lenders often respond positively to keep your business.
- Negotiate soon after signing: Begin negotiations right after signing your purchase contract. Lenders are more motivated to offer better terms early on to secure your loan.
Lender credit pros and cons
Pros
- Lowers upfront costs. Lender credits reduce or eliminate upfront closing costs, which can make buying a home more affordable.
- Frees up money at closing. By paying lower upfront costs, you can keep more cash on hand for moving expenses, savings or emergency funds.
- Increases flexibility in your home search. Since you’ll pay less in upfront costs, you’ll potentially have a larger house budget.
Cons
- Increases your interest costs. Opting for lender credits means accepting a higher interest rate, which increases your long-term borrowing costs.
- Results in higher monthly mortgage payments. You’ll pay more each month due to the higher interest rate.
- Reduces your savings potential. You could end up paying more in interest than you would have saved by covering the closing costs yourself.
Lender credit alternatives
Lender credits aren’t the only way to reduce closing costs. If you can’t afford the higher interest expense, consider these alternatives:
- Check if you qualify for closing cost help. Your state or local housing agency may offer down payment assistance (DPA) programs that cover a portion (or all) of your closing costs. Eligibility often depends on your income and location — but if you qualify, there’s potential for significant savings.
- See if the seller can cover your closing costs. It’s not uncommon for buyers to ask sellers to pay some or all of their closing costs, also known as a seller concession. This is even an option with FHA loans, which allow the seller to cover up to 6% of closing costs.
- Ask a family member for a gift to pay closing costs. If a friend or relative is feeling generous, see if your loan program allows them to gift funds that can be used toward your closing costs.
- Roll closing costs into your mortgage. Rolling your closing costs into your home loan is another way to reduce what you pay upfront. Instead of paying fees at closing, you’ll add them to your mortgage balance and repay them over time. This is different from lender credits (which cover closing costs upfront but come with a higher interest rate), though it is another type of no-closing-cost mortgage.
Frequently asked questions
Yes, you can get lender credits with FHA and VA loans, just like with other loans. However, some fees specific to FHA and VA loans, like the upfront FHA mortgage insurance premium or VA funding fee, are usually rolled into your loan automatically.
It depends on your situation. Sellers may agree to pay some closing costs, which won’t raise your interest rate, but they may not offer much. Lender credits lower what you pay upfront, but they increase your monthly payments. You can still ask the seller, but plan to use the lender credit in addition to or instead of the seller credit, in case they say no.
You can use both — but it’s not very common, since they work against each other. Most people pick one based on whether they want to save money now or later. This doesn’t mean a mix doesn’t ever work, but usually it’s wise to choose the one that better fits your situation.
No — lender credits can only pay for closing costs, not your down payment. Your down payment is a separate fee paid to the lender, so it’s required to come from your own funds or another approved source.
Lender credits typically don’t stop you from refinancing, but they can impact whether your original loan was a smart short-term move. If you plan to refinance soon, taking a higher rate in exchange for a lender credit may make sense — you’ll save on upfront costs without paying the higher rate on your original mortgage for an extended period.
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