General Mortgage Knowledge · 20% of the SAFE exammedium
Correct answer: Borrower accepts a higher interest rate in exchange for lender-paid closing costs
A lender credit is when the lender pays some or all of the borrower's closing costs in exchange for the borrower accepting a rate ABOVE the lender's par rate (zero-cost rate). This increases the borrower's APR because they're essentially financing the credit into the loan. The key tradeoff: higher rate = lower upfront cost. The lender credit appears on the Loan Estimate and Closing Disclosure so the borrower can see exactly what they're trading.
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