What are lender credits and how can I use them?

A lender credit is money offered by a mortgage lender to help borrowers pay for closing costs. Sometimes the lender credit is enough to cover all of the lender's closing costs. "Lender's closing costs" are things like underwriting fees, origination fees, appraisal fees, credit report fees, and other fees charged by the lender. Any leftover credit may be used for non-lender closing costs like prepaid interest, property taxes, transfer taxes, and homeowner's insurance, but cannot be used as part of a down-payment. You cannot keep any extra lender credit leftover as a cash payment, unfortunately. It's a "use it or lose it" credit that can only be used towards qualifying closing costs expenses.

Are interest rates higher on mortgage offers that have a lender credit?

Generally speaking, a mortgage offer that has a lender credit usually has a slightly higher interest rate than an offer without a lender credit. If you are trying to decide whether to go with a mortgage offer that gives you a lender credit, ask your friendly loan officer to break down the math for you to help decide. With a lender credit, you will be paying less or no closing costs up front, but your monthly payment will be higher. You'll want to know exactly how much higher this monthly payment is and then figure out how many years it would take before that higher payment starts to overtake the up front savings from the lender credit.

Example of comparing lender credit offers

The screenshot above was taken from our mortgage rates page and shows how you can compare one rate with a lender credit to another rate that does not have a lender credit. The first offer has an interest rate of 6.25%, does not have a lender credit, and you have to pay closing costs of $988 up front. The second offer has a interest rate of 6.375% but comes with a $698 lender credit and you don't pay any lender-related closing costs. The green box shows that if you do the math, you'll find that it takes a little over 5 and half years before the lower rate offer starts to pay off. Therefore, it's important to know what your goals and plans are when deciding which rate to go with. If you plan to move or refinance within the next 5.6 years, it might be better to go with the lender credit option. You also have to consider how much free cash you have available for closing costs. If you are tight on liquid funds, it might be better to go with a lender-credit offer so that you're paying less, or no, closing costs up front.

Do I need good credit to qualify for a lender credit?

Your credit score is a certainly a primary driver in lender credits. Higher scores (e.g., 740 or higher) signal lower risk, often leading to more favorable lender credits for a smaller interest rate increase. Lower scores (e.g., below 620) indicate higher risk, so lenders might limit credits or require a steeper rate hike to offset closing costs.

In addition to your credit score, a few other factors impact lender credits:

• Debt-to-Income Ratio (DTI): DTI measures a borrower's monthly debt payments against their income. A lower DTI (e.g., under 36%) suggests better ability to handle a higher interest rate, making lender credits more viable. A high DTI (e.g., above 45%) might constrain the lender's willingness to offer credits, as the borrower's budget may not tolerate the increased monthly payments tied to a bumped-up rate.
• Loan-to-Value Ratio (LTV): LTV compares the loan amount to the property's value. A lower LTV (e.g., 80% or less, often with a 20% down payment) reduces the lender's risk, potentially unlocking more generous credits with a smaller rate adjustment. A higher LTV (e.g., 95% with a small down payment) increases risk, which might shrink the credits offered or demand a bigger rate increase.

Lender credits versus discount points

Lender credits are essentially a perk from the lender to the borrower, where the lender agrees to cover some or all of the closing costs such as appraisal fees, title insurance, or origination fees in exchange for charging a higher interest rate on the loan. This can be appealing for those who want to reduce upfront expenses, especially if cash is tight at closing. However, the tradeoff is a higher monthly payment over the life of the loan due to a higher interest rate, which increases the total interest paid long-term. It's a short term savings strategy that shifts more cost into the future, making it ideal for borrowers who plan to sell or refinance before the higher interest accumulates significantly.

Discount points, on the other hand, work in reverse: they're an upfront payment made by the borrower to the lender to "buy down" the interest rate on the mortgage. Typically, one point equals 1% of the loan amount (e.g., $6,000 on a $600,000 loan), and paying it might lower the rate by, say, 0.25%, though the exact reduction varies by lender. This option requires more cash at closing but results in a lower monthly payment and less interest paid over time, making it a smart choice for those who can afford the initial hit and plan to stay in the home long enough to recoup the cost through savings. The key difference lies in the direction of the cash flow and timing of benefits: lender credits ease the immediate burden at the expense of future costs, while discount points demand more upfront to secure long-term savings. Choosing between them depends on your financial situation, how long you intend to keep the loan, and whether you prioritize lower initial costs or a cheaper loan overall.