A preferred lender may be best – but not always
When buying a newly built home or having a new home built, you have several financing options.
You can get a mortgage loan from a lender of your choice. Or you can choose the builder's preferred lender if they have self-financing or if they work with a bank.
You never have to use your builder's preferred lender. And as always, you should shop around for the lowest interest rate on your home loan so you know you are getting the best deal.
Start Buying Mortgage Interest (September 15, 2021)
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Via builders' preferred lenders
House builders sometimes offer their buyers their own mortgage finance. Alternatively, they can work with a mortgage lender or a bank that offers home loans for new construction.
This can be a mutually beneficial partnership that benefits both the builder and the lender – and possibly the buyer as well.
"Many home builders have a preferred lender who they claim is working in the best interests of the homebuyer by providing a better financing option and added convenience," explains Realtor Jason Gelios.
“The buyer is referred to this preferred lender through the contractor, who in turn works to pre-approve the buyer,” he explains.
So there might be benefits to using your builder's preferred lender for speed and convenience.
But as with any mortgage, the loan must be in your favor.
Before deciding on which lender your home owner recommends, it's a good idea to compare the prices and closing costs of some other companies to make sure you're getting the best possible deal on your new home.
Start Buying Mortgage Interest (September 15, 2021)
This is how preferred lenders work
A builder's preferred lender will have an working relationship with the builder. They should be able to streamline the home buying process by approving construction plans and offering the borrower an interest freeze period that remains in place until construction is completed.
To take an example, Gregg Cantor, President and CEO of Murray Lampert Design Build Remodel says that his firm's preferred lender is the U.S. Bank is.
“We have completed many projects through US bank loan programs, making it easy for the homeowner / borrower. The borrower provides the loan documents and we take care of the builders package, including architecture, scope of work, interior design and construction, ”notes Cantor.
“We found the homeowner-lender-contractor model to work well. It's very efficient and when done right everyone is protected. "
Can my builder ask me to use their preferred lender?
Rest assured that you don't have to choose self-financing from your builder or an affiliated lender.
“Builders cannot require a buyer to use their preferred or affiliate lenders. Buyers are not legally bound to a lender prior to signing, and a contractor cannot charge them a higher price to buy from another lender, ”explains Robert Heck, Morty Head of Mortgage.
Forcing a buyer to use a specific lender to take out a mortgage in addition to pre-approving a mortgage would be a violation of RESPA laws.
If you don't want to use your builder's preferred lender, "You can refuse to sign construction or loan documents and request that the requirements be removed from your contract" – Jason Gelios, Realtor
"It also goes against the goal of many other fair lending schemes that were created to allow a more transparent and fairer process for all homebuyers," says Heck.
If your contractor is trying to get you to use their preferred lender, you know your rights.
“You can refuse to sign construction or loan documents and request that the requirements be removed from your contract. If you find that the builder has included in your sales contract an obligation to use their preferred lender, you can seek legal counsel to fix the situation or you can abandon the deal, ”suggests Gelios.
But even if they can't coerce you, don't be surprised if your builder tries to direct you to their preferred lender through incentives and offers.
Benefits of Using Your Builder's Preferred Lender
Choosing a builder's preferred lender can sometimes be cheaper and result in an easier loan process.
“Choosing a preferred lender can provide incentives for the buyer, including upgrades to the buyer's home, seller credit for closing costs, and more,” says Heck.
“Besides, if you choose to go down this route, your credit schedule won't be something the builder or lender will blame you for. Often times, internal lenders offer very long-term fixed interest rates as additional incentives that are in line with your construction schedule. This flexibility is typically not offered as most traditional lenders maximize the 90 to 180 day lock-up period. "
Choosing your builder's partner lender can also save time.
"In our case, we know what the bank needs to successfully finance a loan for a new build or renovation of an entire house, which gives the consumer a very lean process," adds Cantor.
Realtor Samantha Odo also points out that when the deal is closed, it is in everyone's best interests when you select a contractor's preferred lender.
"Your preferred lender is someone who is likely to err on the side of borrower approval for the construction project more often than a randomly selected lender," says Odo.
"When a lender has a good relationship with a contractor, it's usually because they work well together, have a good process, and enjoy higher approval rates."
Cons of Using Your Builder's Preferred Lender
On the other hand, there can be drawbacks to using an affiliate lender as well.
“The disadvantages lie in the affiliation between the lender and the client. If the financing company is the same one that builds and sells the house, there is a potential conflict of interest, ”warns Heck.
"While this doesn't necessarily mean that a buyer will get a worse offer or interest rate, it is caution," he says.
Be aware that the preferred lender may work too hard to please the builder / seller without necessarily representing the best interests of the buyer.
"Not every preferred lender will act this way, but when you have a lender who loves getting referrals from a builder, their service can be skewed," says Gelios.
One of the biggest risks of saying "yes" to your builder's preferred lender is you may not get the best loan deal. With poorer credit terms, you could pay a higher interest rate than if you had looked around and compared offers from different lenders.
Fortunately, there is a simple solution.
You can get pre-approved by some lenders and compare their offers to make sure you are getting the best rate.
The approval process takes a little longer for a new building than for an existing house. But when you consider that a lower mortgage rate can easily save you thousands, the extra hassle is usually worth it.
Compare your loan options. Start here (15.09.2021)
Why builders preferred mortgage lenders
Unsurprisingly, many construction companies and construction firms are choosing to partner with an outside lender or offer in-house financing options. This increases the convenience factor for buyers who mostly end up needing a mortgage loan.
“It is most common for home builders to have an affiliated lender for purely financial reasons and to increase profits from new construction and home sales. In some situations, builders can have a preferred lender based simply on who they trust or who they have worked with in the past, ”adds Heck.
Beyond financial incentives, “the builder prefers to be in control of the process. The builder's lender may work harder to secure a loan for a buyer and will let the builder know sooner if the buyer doesn't qualify. It's easy to see why a builder wants this level of control, ”says real estate attorney and broker Bruce Ailion.
Often these advantages work out to the benefit of both the buyer and the builder. However, if you can find a better deal, be sure to contact the company that will save you the most money.
Your contractor can't ask you to use their preferred lender – so don't let anyone think otherwise. And if the lender doesn't offer competitive rates, it is in your best interest to look for other financing.
The Bottom Line: Should You Use Your Builder's Preferred Lender?
The truth is that your home builder's preferred or in-house lender may offer the best loan deal that will save you the most money and time.
They may offer incentives, a longer fixed interest rate, and / or a lower interest rate than the competition. But you won't know for sure unless you do your due diligence as a borrower.
“By looking around and comparing lenders, you can determine whether the offer of a preferred lender is the best long-term option or whether you would be better off with a lender of your choice,” recommends Heck.
Confirm your new plan (September 15, 2021)