The topic of today’s blog is closing credits, and not the kind that scroll up the screen after a movie. The type of closing credits fit for a Ruoff blog are those associated with a mortgage. “Closing credit” is a term that could mean one of three different things. It all depends on where the credit appears on your mortgage settlement statement (i.e. which line item it represents).
Sometimes closing credits are a good fit for a buyer, sometimes they’re not the best choice, and sometimes they’re not even offered. If your lender or Realtor brings up the subject of credits, it will help to have an idea of what they are so you can ask the right questions. Every loan package is unique so don’t be afraid to ask a million questions along the way. A good loan team will be happy to address your concerns throughout the loan approval and closing processes.
In the meantime, here’s the basic rundown of the three types of closing credits:
Lender credits are essentially the opposite of points. Lenders will sometimes offer to give funds the buyer, or to eliminate some closing costs, in exchange for a higher interest rate. (Conversely, points are something they buyer purchases to lower the interest rate.) Lender credits can benefit the buyer by reducing the amount of money he or she must bring to the closing table. This financing feature might be in your best interest if your cash reserves are low. Your loan officer can advise on whether he or she thinks lender credits are a good option and can offer advice as you make a decision. In general, lender credits are good for reducing your expenses at the closing table but will increase the interest amount on your monthly payment. When deciding on whether to accept a lender credit, look at what your payment would be both with and without it. It’s up to you, the buyer, to determine whether the higher payment justifies the extra money you’ll have in the bank. Sometimes it does.
Seller credits, also known as “concessions,” are funds paid from the seller to the buyer at closing. They are negotiated as part of the purchase agreement. Your Realtor as well as your loan officer can advise on whether this type of credit could be the right fit for you. The seller’s real estate agent will also weigh-in if the topic comes up during contract negotiations. Discuss any seller-paid credits with your loan officer before signing the purchase agreement because seller credits could affect your financing. Seller-paid credits cannot be used to meet the minimum down payment requirement if one exists for your loan type. Some loan programs also limit the specific costs or line items that a seller credit can reimburse.
First-time home buyers may qualify for a program called the Mortgage Credit Certificate (MCC). MCC’s are a tax credit intended to offset the buyer’s monthly interest payment. While almost any fixed-rate home loan is eligible to take part in the MCC program, interested borrowers are advised to get involved with the program early in their home search. MCC applications are due at the time the buyer applies for a mortgage, regardless of when the buyer actually files his or her income taxes. Also, keep in mind that MCC’s are subject to a yearly maximum payout from the federal government. One more thing: Only primary residences are eligible for MCC’s. Second homes and investment properties don’t qualify.
Those are the three basic types of closing credits. Once you begin the loan approval process, and especially when you enter into a purchase negotiation, you may have additional questions. That’s what loan officer and Realtors are for! If anything seems confusing or new to you, ask for clarification. Closing credits, whether they’re paid by the lender, seller, or federal government, could be a good fit. The best way to know is to work with a stellar loan team and to ask questions along the way.
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