Buying a home is a major expense, especially if you aren’t aware of the upfront costs it takes to become a homeowner. These expenses include closing costs, the down payment, home inspections and more. Knowing exactly what options are available can make it easier to buy a home. Lender credits can be a great help when buying a home. In this blog, we’ll discuss how lender credits can help with out-of-pocket expenses and why you might want to take advantage of them.
Costs of Buying a Home
Purchasing a home, especially if it is your first, can be financially and emotionally stressful. There are upfront costs that you’ll need to be ready for which can quickly add up. They include:
- Down Payment: If you’re borrowing money to buy your home, the lender will likely require a down payment. The amount will depend on the loan program and your financial situation. Based on your credit score, the standard down payment is 20% of the home price. For example, on a $300,000 home, a 20% down payment would be $60,000. There are loan programs that allow a down payment as little as 3%, but you’ll need to have a high credit score and meet other requirements, such as paying Private Mortgage Insurance (PMI) with your monthly mortgage payment. VA loans can be an exception to this; if you think you might qualify for a VA loan based on your military service, ask your lender what they offer.
- Closing Costs: Closing costs are a combination of things that need to be paid before the home title can change hands, such as appraisal fees and home inspection. These costs can equal 1% of the home’s sale price. For example, with California’s median home prices, those closing costs could add up to $8,433, according to Bankrate.com. Buyers and sellers could agree to split these costs but in a competitive housing market, the total amount could fall on the buyer to pay.
- Title Insurance and Escrow Fees: A title company charges fees to ensure the property ownership history is clean and does not have any liens, judgments, unpaid taxes or ownership disputes. Escrow fees are charged by a third-party that is handling all the funds and documents during the transaction, including initial deposits for taxes and homeowner’s insurance, until both parties finalize the sale.
- Earnest Money: Earnest money is a good-faith deposit that the prospective buyer puts down when making an offer on the home. The amount ranges from 1% to 3% of the home purchase price. In return, the seller takes the home off the market while the mortgage is processed, appraisal and inspections are done and other contingencies are met. This money is held in escrow but can be applied to closing costs or the down payment at closing.
Buying a home requires a clear understanding of the costs involved. Ideally, having enough saved to cover these costs can reduce the stress of the purchase and put you in a better position as a new homeowner. But if you need a little help, lender credits are one way to get it.
What Is a Lender Credit?
A lender may agree to cover some of the closing costs if the borrower is struggling to cover all the costs or if they are hesitant to use additional savings. In return, the borrower agrees to pay a higher interest rate on the home loan. Lender credits help buyers who want to reduce their cash needed at closing, cover items such as appraisal, title or escrow fees and keep more cash on hand for moving, renovations and emergencies.
According to RocketMortgage.com, the average closing costs could run from 3% to 6%. Using lender credits will increase your interest rate, therefore your monthly principal and interest payments will rise. Some financial institutions may not offer lender credits, so it is important to select one that has this option in case you need it. Lender credits are most beneficial if you:
- Don’t have long-term plans to stay in the home.
- Need help covering closing costs to complete the purchase.
- Want to prioritize cash flow and savings.
- Expect interest rates to drop so you can refinance later.
How Can Travis Credit Union Help?
Travis Credit Union is focused on your financial wellness, including becoming a homeowner. Our knowledgeable mortgage loan officers will walk you through the entire process and help you find the right loan for your unique situation. TCU offers a variety of options, including 30-year fixed rate mortgages, adjustable-rate mortgages, FHA and VA loans.
Want to learn more? Use TCU’s Knowledge Base for free online courses on a variety of topics, such as buying a home, saving money and building good credit.