Lender Credits: What They Are and How They Work
Lender credits can help pay closing costs, but the help isn’t free. The buyer still pays closing costs in the form of a higher monthly payment throughout the life of the loan.
Closing costs could range from $9,700 to over $15,000 for a $400,000 home, according to Fannie Mae’s closing cost calculator. These funds are due upfront and are in addition to your down payment.
But lenders can help buyers pay their closing costs through lender credits.
In return for helping cover closing costs, the lender sets a higher mortgage rate on the new loan.
What Is a Lender Credit?
A lender credit helps reduce the amount of money a homebuyer needs to bring to the closing table. Buyers who don’t have enough cash — or buyers who’d rather hold onto their own savings — can use lender credits instead.
The first thing to know about lender credits: They aren’t a favor.
[Lender credits] may sound generous. But it’s really a cost shift, not a cost elimination.
“It may sound generous,” said Andreis Bergeron, a licensed mortgage originator who now serves as vice president of sales at RedAwning which helps clients manage short-term rental properties. “But it’s really a cost shift, not a cost elimination.”
Lenders shift the buyer’s upfront closing costs by charging a higher mortgage rate on the new loan. So, the buyer still pays the closing costs in the form of higher monthly mortgage payments.
In fact, the buyer will probably repay more in interest than they received in credits unless the buyer sells the home or refinances within a few years.
The Impact of Closing Costs
When it’s time to pay closing costs, repeat home buyers have an advantage: They’re often selling an existing home while also buying the new one. Repeat buyers can use profit from their home sale to absorb closing costs on the new home.
These buyers might see closing costs the way grocery shoppers see sales tax: as a manageable nuisance.
First-time buyers feel these costs differently. These buyers may have just sacrificed for years to save a down payment while also paying rent, down payments that averaged 9 percent in 2024, according to the National Association of Realtors. On a $400,000 home, 9 percent down is $36,000.
Now, adding another $15,000 in closing costs (again, from Fannie Mae’s calculator) brings this upfront cash outlay to $51,000 to buy a median priced home. This is a huge hurdle.
“Lender credits can be a clever workaround,” Bergeron said, especially for “buyers who care more about getting into the home than whether their loan is optimized over time.”
Who Can Benefit from Lender Credits?
Lender credits can generate much-needed home buying momentum for borrowers who don’t already own real estate, but anyone can ask for credits. Lender credits are often attractive to:
Buyers Who Want to Make Bigger Down Payments
Making a bigger down payment can lower the interest rate on a new mortgage. When paying extra down can save more in interest than lender credits will cost, buyers might prefer to spend their closing costs money on the down payment instead. Then they could use lender credits to fill the resulting cash gap.
Buyers Who Don’t Want to Part With Their Savings
Some buyers would rather make a bigger house payment than begin homeownership with a depleted savings account. Lender credits let them keep more money in savings in case they face an unexpected home repair or job loss.
Buyers Who Expect to Sell or Refinance Soon
Refinancing the new mortgage, or selling the home, will put an end to the loan’s monthly payment, including the additional interest that repays lender credits. Buyers who exit a mortgage within a year or two use lender credits without paying their long-term costs.
That said, it’s not OK to lie about future plans for the loan in order to secure lender credits.
How Do Lenders Determine Credits?
To understand how lender credits work, it helps to know about their opposite: Discount points (also known as mortgage points).
Discount points: the home buyer pays extra cash at closing in exchange for a lower mortgage rate on the new loan
Lender credits: the buyer receives credit at closing in exchange for a higher interest rate on the new loan
On a loan approval with no discount points and no lender credits, the borrower pays the loan’s base rate — the rate the lender assigned based on the buyer’s credit score, debt-to-income ratio (DTI), mortgage insurance coverage, property type, and other personal factors.
This base rate then becomes the starting point that lender credits or discount points can increase or decrease.
In the example below, the borrower qualified for a base rate of 6.75 percent without points in either direction.
Rate | Cost or credit |
6.25% | 2 points from borrower (borrower buys discount points) |
6.5% | 1 point from borrower (borrower buys discount points) |
6.75% | No points to or from borrower |
7% | 0.5 points to borrower (borrower receives lender credits) |
7.25% | 1 point to borrower (borrower receives lender credits) |
All figures are for example purposes only.
This borrower could pay extra cash to the lender at closing to lower the loan’s rate or receive credit from the lender in exchange for a higher loan rate.
That said, there is a limit: If this borrower’s credit score dropped before closing, raising the base rate to 7.25% for example, receiving lender credits would push the loan’s rate higher. This could threaten loan approval by pushing the loan’s payment beyond the buyer’s price range.
Who Is Eligible for Lender Credits?
Not every borrower can afford lender credits because the higher interest rate could push them over approval standards.
For example, let’s say you’re borrowing $300,000 for a new home. You were approved at 6.75% conventional loan over 30 years. The principal and interest payment (P&I) is $1,946. But your maximum for approval is $2,000.
In other words, everything’s on track.
But you ask for a lender credit of $3,000. In exchange, the lender increases your 6.75 percent rate to 7.25 percent, pushing your monthly P+I payment up by $101, to $2,047.
This higher payment exceeds the highest monthly payment you qualify for. You’d have to find another way to pay closing costs to get this loan.
Related: What Income Do You Need for a $300,000 Home?
Mortgage Type Can Make a Difference
The borrower above may save more with an FHA loan. FHA-insured loans are designed to insulate borrowers who have average credit from the higher mortgage rates they’d pay on a conventional loan.
For example, the same borrower who got a 6.75 percent conventional rate may be able to get 6.5 percent through FHA, even with the FHA’s mortgage insurance. Then, this borrower might have just enough room in their monthly budget to tack on the 0.5 percent rate hike for lender credits.
This isn’t a one-size-fits-all solution. Every loan scenario is different. Some borrowers may pay more with FHA. Generally, though, FHA loans can help credit- and cash-challenged buyers get approved for less.
Lender Credits vs. Mortgage Points
Southern California Realtor Ken Sisson uses a golf analogy to explain lender credits vs mortgage points to his clients.
Borrowers who get neither points nor credits come in at par, he said. They receive an interest rate based on their loan file.
Borrowers who use lender credits will pay a higher rate than they would normally qualify for; borrowers who buy discount points receive a lower rate in exchange for higher closing costs.
Lender Credit | Zero points / credits (par) | Mortgage Points |
Lowers closing costs | Buyer owes closing costs due | Raises closing costs |
Raises your interest rate | Rate based on loan profile | Lowers your interest rate |
Raises your monthly payments | Payments reflect market conditions / buyer’s eligibility | Lowers your monthly payments |
Frees up money to use toward a larger down payment, home repair costs, and more. | Doesn’t affect savings | Uses up savings |
But golf analogies aside, what does all this mean in real dollar figures?
This table shows the potential impact of getting lender credit or buying discount points:
With lender credit | With 0 credits or points | With one discount point | With two discount points | |
Loan size | $300,000 | $300,000 | $300,000 | $300,000 |
Interest rate | 7.0 | 6.75 | 6.5 | 6.25 |
Closing costs | $10,500 | $12,000 | $15,000 | $18,000 |
Monthly PI payment | $1,996 | $1,946 | $1,896 | $1,847 |
Total interest | $418,527 | $400,486 | $382,633 | $364,975 |
These figures are for example purposes only. Every loan scenario is unique.
In this example, saving $1,500 in closing costs leads to more than $18,000 in extra interest charges. Paying $6,000 in extra closing costs saved almost $36,000 in interest. However, these lifetime savings figures don’t take into account refinancing or selling the home prior to the 30-year mark.
When to Use Lender Credits
“Lender credits can absolutely be a great tool — if you understand what you’re trading,” said Josh Lewis, a certified mortgage consultant with BuyWise Mortgage in Huntington Beach, Calif.
“You're essentially saying, 'I'm OK with a slightly higher interest rate in exchange for some upfront help with closing costs.'” Lewis said. “That makes the loan cheaper today, but more expensive over time. For the right buyer, that’s a smart tradeoff. For the wrong one, it’s a trap.”
So who is the right buyer?
A Buyer With Short-Term Homeownership Plans
In the table above, the buyer pays $50 extra a month in exchange for the $1,500 in closing cost help from the lender. At this rate, it would take 30 months, or 2-½ years, for the lender to get its $1,500 back from the buyer.
So, by refinancing or selling the home after 2-½ years, this borrower would break even on the lender credits. Selling or refinancing sooner than 2-½ years would be even better.
In this way, lender credits can help a homeowner who knows a refinance or a sale will be in their near future.
“But you have to be aware that a future refi is never guaranteed,” Lewis said. “Life, credit, or the market can change. So if you go this route, make sure you’re comfortable with the payment as is, even if rates never drop again.”
A Buyer Who Couldn’t Pay Closing Costs Without Lender Credits
Buying a first home turns renters into property owners, and property owners can benefit from market appreciation. A home that’s worth $300,000 now could be worth $350,000 in a few years. Plus, the homeowner could decide to rent the home for extra income.
Buyers who treat home buying like investing may not mind paying more to get their foot in the door of property ownership, even if lender credits increase the cost of admission.
A Buyer Who Values Flexibility More Than the Cost of Extra Interest
For some buyers, financial flexibility matters more than a healthier balance sheet. Lender credits can preserve flexibility by lowering upfront closing costs.
A Buyer Who Can Use Lender Credit and Save Long-Term
It’s not likely, but some borrowers can use lender credits to save long-term money. For instance, a borrower who takes lender credits could free up enough cash to increase their down payment to 20 percent.
Paying 20 percent down on a conventional loan eliminates the need for private mortgage insurance (PMI). A PMI policy could add about 0.5-2% of the loan balance per year to the loan costs during the early years of the term.
Related: What Is Private Mortgage Insurance (PMI)?
When Not to Use Lender Credits
“If you’re planning to be in the home for the long haul, you’ve got to be really careful with lender credits,” Lewis said. “The higher rate you’re accepting today might seem like a small bump, but over 10, 15, or 30 years, that extra interest can really stack up.”
You can see the stacking nature of this extra interest in the table above. Paying $50 extra a month for three years adds $1,800 to the loan’s cost. That’s manageable. But paying $50 extra for 30 years totals $18,000 in additional finance charges.
“Now, no one has a crystal ball,” Lewis said. “We don’t know what rates will do or if another refi opportunity will come along. So if you’re thinking long-term and don’t need the credit to make the deal work, it might make more sense to just take the zero-point rate and be done with it.”
Other Ways to Save Money When Buying a Home
Lender credits aren’t the only way to pay closing costs. Buyers can also:
Ask the seller to help: It’s not uncommon for a seller to help pay closing costs, especially in buyer’s markets. Your Realtor should help negotiate these seller concessions into the contract to purchase the home
Seek down payment assistance grants: Low- and moderate-income buyers can find local down payment assistance grants and loans that can also help cover closing costs
Look for no-closing cost loans: Some lenders absorb all closing costs in exchange for a higher rate and a commitment to stay in the loan
Use a no-money-down loan: The USDA and VA loan programs require $0 down, freeing up more money for closing costs, but not every buyer can participate. USDA works for moderate-income buyers in rural areas; VA loans are a benefit for military families
Use matched savings programs: Some employers will match part of their employees savings for a home
Ask family or friends for help: More and more graduates and engaged couples are asking for home-buying cash instead of graduation and wedding gifts
Ask for an early inheritance: Compared to waiting until death to give an inheritance, some grandparents or aunts and uncles might like the idea of helping their family members buy a home now
Get deferred payment loans: A deferred payment loan can generate cash for closing costs without inflating the borrower’s debt-to-income ratio for the mortgage
Borrow from retirement: Many employer-managed retirement plans allow temporary borrowing for home buying
Borrowers could combine several of these strategies to piece together closing costs on the new home. These could also be combined with lender credits.
How to Determine If Credits Are Worth It
Should you use lender credits to help with closing costs? This is really a question about short-term vs long-term costs.
Ask your lender for a breakdown of upfront and long-term costs with and without lender credits in the equation. Or, experiment with a mortgage calculator to see monthly loan costs at different interest rates.
If lender credits are your only way to cross the threshold into homeownership, they’re probably worth the cost. If you have more options, compare the cost of lender credits to the cost of the other choices.
Pros and Cons of Lender Credits
Along with the cost, these pros and cons can also help decide whether to use lender credits:
Lender credit pros | Lender credit cons |
Can allocate more money for the down payment | Higher long-term interest charges |
Higher cost can be avoided if you refinance or sell within a few years | The resulting higher interest rate could push the loan out of your monthly price range |
Can help get into a home sooner | Higher rate slows principal payoff, making it harder to refinance later |
Can avoid overreliance on savings, leaving more financial flexibility | Can’t generate enough cash for all closing costs |
How To Negotiate Lender Credits
Like everything else about mortgage lending, lender credits vary from lender to lender.
To find the best deal, shop around. Send one lender’s quote to another and try to make them win your business.
Lender Credits: A Great Option in the Right Situation
Lender credits can be a life saver for a home buyer who comes up short on closing costs — as long as the borrower understands the tradeoff: higher borrowing costs for the life of the loan.
Buyers who need lender credits can usually gain even more buying power when they shop around for the best rates.
