One common scenario that buyers will often experience when purchasing a newly built home, is being approached by the builder and urged to use their preferred lender.
The builder may offer various things, like extra landscaping, or money down at closing etc. And to the average buyer, these all seem to be really great deals! But who really benefits? How can a buyer know which source of financing is going to be best for them?
First, it is important to note the relationship between the builder and the lender. Are the lender and the builder financially tied? If so, the builder is collecting a portion of the profit through an affiliate company that shares the proceeds, which is why they are willing to offer extra concessions.
In this scenario, you don’t really have a second opinion to lean on, as the lender and the builder are effectively the same entity. There is no oversight if you end up getting a bad deal.
Other times, the company may really just like using that particular lender, or they may recommend them because they know the area well, etc. It is important to know the working relationship between the lender and the builder.
Second, how good is the actual deal they are making? It is always wise to do an “apples to apples” comparison with another broker or lender. Have them draw up a scenario with the same rates and see what they would be able to offer. Sometimes the offers the builders make are great, other times, they only seem that way on the surface. It is important to get an accurate reading on how much the concessions are worth in cash value.
A good mortgage broker will be able to do this pretty easily. Sometimes the math can get a bit tricky, especially if the builder is adding things to the house, you more or less have to price everything out and show a side by side comparison. This way, you can see which lender is offering the better deal in terms of cash to the buyer.
A couple real-life examples:
Recently a client came to us with a "great" deal: the builder offered to contribute $4000 towards the closing costs if the client would use their preferred lender. After shopping, our client found that another lender (us, of course!) could offer a rate that was 0.5% lower with no closing costs. The builder was giving a false benefit to the borrower.
In another example, the preferred lender offered $3000 in credits towards the closing costs. But, after examining their official offer, they were charging an origination fee of $4000, which more than offset the credit. Again, they advertised a false savings/benefit.
There can be some upsides to using a builder’s preferred lender, such as is the case when no one else will finance the borrower, or when the offer is really just better than everyone else’s. It can sometimes be the case that the builder is really offering a deal that is the best on the market.
Bottom line: Shop around.
You’re never going to be punished for shopping around and taking the best deal. Make certain you do this early on in the process, give yourself a few months, at least, to find the best deals. Ultimately, you’ll have to make a choice, but it is never a bad idea to have a few different people competing for your business.
If you’re currently building a home and would like a side-by-side comparison of the costs and benefits of going with a particular lender, please feel free to give us a call!
