What Are Lender Credits?

Lender credits are credits offered by mortgage lenders to offset a borrower’s closing costs. A lender credit reduces the amount of money you need to pay upfront at closing in exchange for a higher interest rate on your mortgage. One lender credit is usually equal to 1% of your loan. If you take out a loan for $350,000, one lender credit at 1% would equal $3,500. 

The more lender credits you receive, the less you’ll have to pay in closing costs, and the higher your interest rate will be. Lender credits can only be used to cover closing costs. They can’t be applied towards any other financial obligations related to your mortgage, such as increasing your down payment or lowering your debt-to-income (DTI) ratio.

According to a 2024 Zillow survey of home buyers, 23% said closing costs were the most unexpected surprise expenses when closing on their home. In this blog, we’ll help you determine if you qualify for lender credits to lower your closing costs, if they’re worth it, and how to negotiate credits with your lender.

Lender credits vs. mortgage points

Lender credits are essentially the opposite of mortgage points. Lender credits lower your closing costs in exchange for a higher rate, while mortgage points increase your upfront costs in exchange for a lower rate.

Also known as discount points, mortgage points require you to pay a one-time fee upfront to lower your interest rate over the life of the loan — essentially discounting the borrowing cost. Each point you purchase reduces your interest rate by a certain amount, usually 0.5%.

Mortgage points are ideal for borrowers with extra cash who want to reduce their monthly mortgage payments and plan to stay in their homes long-term. On the other hand, lender credits are better suited for borrowers with limited cash who prefer to reduce their closing costs and either don’t plan to stay in their homes for the entirety of their loan term or plan to refinance after a few years.

How are lender credits determined?

Lender credits are determined by a lender’s policies. Each lender has its own way of determining which borrowers qualify for lender credits, but most lenders base lender credits on the following factors:

Loan amount

Lender credits are calculated as a percentage of your loan amount, which means that the size of your mortgage impacts the amount of lender credits you can get. Depending on the type of loan you’ve obtained, you might receive 2%-6% of your loan amount in lender credits. On a $350,000 mortgage, that would be between $7,000 and $21,000.

Closing costs

The amount of lender credits a borrower can receive also depends on their closing costs. Some lender credits cover specific closing costs, such as loan origination fees or title insurance. Lender credits that cover only a few closing costs will have lower interest rates than lender credits that cover all of your closing costs. Additionally, lenders often cap lender credit amounts to make sure lender credits are only applied towards closing costs.

Loan-to-value ratio (LTV)

Borrowers with high LTV ratios are usually offered less lender credits than borrowers with low LTV ratios. This is because larger loans are a greater risk to lenders. Putting down a larger down payment can lower your loan-to-value (LTV) ratio.

What is the maximum amount of lender credits I can get?

The maximum amount of lender credits you can get often depends on lender policies, the property type, your loan program and down payment amount. For instance, Fannie Mae set lender credit limits for conventional mortgages based on the borrower’s loan-to-value (LTV) ratio and property type. The lender credit range is between 2% and 9% of the property’s value.

Do I qualify for lender credits?

The same criteria that makes you a good candidate for a mortgage will likely make you a strong candidate for lender credits. Lenders normally look for the following when a borrower requests lender credits:

• A good, or excellent credit score (660+)
• A large down payment (20%, or more)
• A reasonable debt-to-income ratio (43%, or less)

Are lender credits worth it?

Lender credits might be worth it if you’re short on cash, but eager to close a home purchase. You may also consider lender credits if you plan to use the cash you have saved in other ways, like to pay for home improvements after you move in. Here are a few scenarios in which requesting lender credits might make sense.

You need cash for homeownership expenses

When you buy a house, it’s always best to have some money set aside for unexpected maintenance costs. Home maintenance costs can quickly add-up, especially if it’s your first home. Set aside at least 1% of your home’s value to cover initial repairs. If you’re struggling to save up for homeownership expenses and cover closing costs, lender credits could ease the financial burden.

Your lender requires cash reserves

Lenders sometimes require borrowers to maintain a certain amount of cash reserves in their bank accounts until closing day. Cash reserves reassure lenders that you’ll be able to make your first few monthly mortgage payments in the event of an emergency. If paying for closing costs would require you to eat into your cash reserves, consider asking for lender credits.

You’re getting a FHA streamline refinance

FHA streamline refinances help FHA borrowers refinance their mortgage with minimal paperwork. However, this type of refinance doesn’t allow borrowers to roll closing costs into their new loan amount. If you’re worried about paying closing costs on your FHA streamline refinance, lender credits could work as long as you’re willing to accept a higher rate.

How will lender credits affect my mortgage payments?

Lender credits alter the terms of payment on your mortgage. Before accepting lender credits, it’s important to consider how much more you’ll have to pay in interest over the life of your loan. Although your monthly mortgage payments may only increase by a small amount, this can add up to thousands of dollars across your loan term. 

Lender credits example

Let’s assume you take out a mortgage for $300,000 on a 30-year term at a fixed interest rate of 7%. Your lender offers you a 7.25% interest rate in exchange for three lender credits that cover your total closing costs of $9,000. 

If you accept the lender credits, your monthly payment would be $2,657. If you don’t accept the lender credits your monthly payment would be $2,606. Although the difference would only be $51 each month, this would amount to $18,360 by the time your loan matures. Instead of paying $9,000 at closing, you’d pay $18,260 over the life of the loan.

How to negotiate lender credits

If you’re thinking about using lender credits to cover some, or all of your closing costs, start by asking your lender if they offer lender credits. You should also ask your lender how many lender credits they’d be willing to give you and how much you could save in closing costs. 

It’s a good idea to inquire about lender credits when you’re shopping around for the best rates. This can give you a better idea of your total mortgage costs with each lender before committing to one lender over another. 

Lender credit alternatives

Lender credits aren’t the only way to save on closing costs. Borrowers should also consider the following options if they don’t want to increase the interest rate on their mortgage. 

• Apply for closing cost assistance with state and local housing agencies.
• Ask the seller to pay for your closing costs through a seller concession.
• Ask a family member to pay for your closing costs as a gift.

Final thoughts on lender credits

Lender credits help borrowers avoid closing costs upfront in exchange for higher interest payments in the future. Many borrowers can benefit from such an arrangement, especially if closing costs are a barrier to homeownership. However, before accepting lender credits, borrowers should consider how much more money they’d have to pay their lender over the life of the loan and if it’s worth the sacrifice. It’s also important to know that not every lender offers lender credits, and even if they do, they’re not obligated to offer credits to every borrower. 

*Zillow Home Loans; an equal housing lender. NMLS #10287