Eureka! Money-Saving Tips For Military Buyers: Lender Credits

Military buyers: what if I told you there is a way to buy a house and not only bring zero cash to the closing table, but maybe even walk away with a check in your pocket?  I can tell you from experience with my own military clients that it is in fact possible. I’ve seen it happen dozens of times.

Now keep in mind that with so many variables; each buyer is different, each loan is different. Also keep in mind that my professional experience lies solely within the state of Oklahoma and rules may be different in other states but here’s the basic idea: if a lender offers a credit at closing, this may be enough (usually in conjunction with seller’s assistance) to cover all closing and escrow expenses.

How can lenders afford to offer credits, and why don’t all lenders do this?

Most banks, credit unions, and large institutions cannot offer lender credits without increasing your interest rate. The reason for this is their business structure; large overhead expenses require larger cuts from each loan they originate. In Oklahoma, I only know of one lender in my area that offers credits to buyers, Financial Concepts Mortgage. Their lean business structure allows them to function with a smaller percentage of each loan (at the interest rate offered by competitors) and as a result, they are able to credit the difference back to their clients. 

Let’s illustrate how this might work with a theoretical buyer; Joe.  Joe is a military buyer and elects to use his VA loan with zero down payment. Joe chooses a lender that offers a lender credit. He also negotiates for the sellers to pay a portion of his closing costs in the purchase contract. If the lender credit plus the seller-paid assistance covers all of Joe’s expenses then he brings nothing to the table. If the amount paid by the lender and seller is greater than his expenses, Joe may be able to get money back.

Here’s how:

There are two main points to consider here. The first one is that you cannot “profit” from buying a house, that is, you cannot receive money back at the closing table that you did not put in. So for example, if the seller’s agreed to pay $4,000 with Joe’s lender providing a $2,000 credit, and Joe’s closing expenses only came to $5,000, Joe could receive the extra $1,000 back at closing.

Seller Paid Closing Assistance:     $4,000

Lender Credit:                                $2,000

Buyer’s Closing Expenses:          - $5,000

Excess Funds:                                 $1,000

The only way he can receive this money however, is if he has already paid at least that much in the process; a great way to ensure this is by paying a solid earnest money deposit. In our example, if Joe only paid $500 in earnest money, the most he is allowed to receive at the closing table is $500 of the $1,000 overage. In this case, the extra $500 would go back to the seller since it was not needed. If however, Joe had paid $1,000 or more in earnest money, he would be allowed to receive the entire $1,000 back at closing.

For this reason, buyers that plan to use a lender offering credits should consider a larger earnest money deposit when writing an offer; especially if they are asking for seller assistance as well. Discuss this consideration with you real estate agent to make sure you understand all of the circumstances that may cause you to forfeit your earnest money to the sellers. Make sure you are comfortable with that risk.

The second point to consider is interest rate. Usually, you can qualify for a larger lender credit if you are willing to accept a slightly higher interest rate. As a general rule of thumb, the lowest interest rate possible is best, right? However, if you are a military buyer and planning to sell your home at the end of your assignment in three or four years, a quarter of a point in interest rate may save you less money than the increase in lender credit. Crunch the numbers with your lender and decide what is best for you.

Lastly, you do not have to use a VA loan to utilize lender credits. Other loans can benefit from them too. I highlighted VA loans in this article since VA provides the only zero down payment option and therefore, is the best scenario for receiving money at the table. Again, I cannot over emphasize the importance of finding a good lender and discussing your best financial strategy with them when buying a home.

Pick a good lender. Have this chat with them before you put on offer in on a home and decide what the best financial strategy is for you. Best of luck. Happy hunting!