Should You Use the Builder’s Lender?
If you ever want to strike fear in the heart of an independent mortgage broker, just text them, “I’m thinking about looking at new construction” - I guarantee at least a 20 point spike in their blood pressure. Why, you might ask? The infamous builder’s “preferred lender” and incentives that are provided to use them. While real estate licensees such as your agent are legally and ethically prevented from influencing your lender selection beyond a simple recommendation (read: they can’t be getting paid or paying you to go in any specific direction) there is nothing that prevents the seller of the property from offering credits based off which lender you select, and builders frequently offer credits to use their approved lenders and settlement agents.
Why would they do that?
Well, I’m not a home builder, but there is a clear benefit for a home builder to have some influence on the lenders handling their buyers’ financing: delays in settlement and late loan denials cost the builder a lot of money! The builder is generally holding the cost to construct the home on a commercial credit line with a higher interest rate than a typical mortgage. If a $500,000 dollar home sale is delayed by 1 month and held on the builder’s credit line at 10% for an extra 30 days, that costs the builder $4166.67 and can delay the next home from starting. Of course, a reasonable idea has spiraled over the years into another opportunity for profit.
The Two Builder Lender Models
There are two basic structures this relationship takes. The first is that the builder can have an independent mortgage company that they create a relationship with. Typically in these relationships, the builder and lender split the cost of the credit to the buyer. I remember when I was new in the business and being coached on how to market to builders, I was told very matter of factly, “So when you get a lead from the builder account, you just increase the rate enough to show that .5% credit back for the incentive” - hardly a special deal, really. Generally the incentives with these relationships are smaller and easy enough to match or beat with your own lender.
The second model is where the builder owns the mortgage company under its corporate umbrella to provide an additional corporate profit center. Some examples of this model would be Ryan Homes, Stanley Martin Homes, Pulte Homes, etc. Because there is a direct financial benefit to the company from the mortgage going to their lender, the incentives are typically higher and sometimes more than what the lender would even make on the loan. When the same company is evaluating the transaction overall, and can pull money from the build profit, there’s just more meat on the bone there than your independent lender has to be able to provide you.
OK so why shouldn’t I go for it? It’s free money!
I am really the worst nightmare of most mortgage sales coaches, because sometimes you can and should use the builder’s lender. Sometimes it’s too much money to turn down, and I get that. However, there are some things to keep in mind about these lenders- their staff is working with a captive audience that is heavily incentivized to use them, and therefore you may not experience the same service as with a lender whose income depends on making you happy. I know some great people who work at such lenders, but at the end of the day, corporately their responsibility is to the seller, not to you.
What should I ask to make a decision?
Great question. First things first, let your lender contact know that you are looking at new construction and the amount of the credit being offered, and ask them for a quote for comparison. Next, ask the builder’s representative for the contract language regarding the incentive to use their lender. You would be surprised how frequently that differs from what clients are told, and some credits are still available with your own lender. Armed with that information, ask:
To Yourself: Is my financial picture complex in a way that it makes sense to pay a little more for more experienced staff? Am I self-employed, credit challenged, or otherwise in need of service to get my loan to the finish line that might not be available from a potentially less experienced originator? (Search the originator on www.nmlsconsumeraccess.org and see how long they have been doing this, where they have worked before, etc)
To the builder: What happens if your lender denies my loan? What happens if I find better terms elsewhere? Are there any circumstances where I can keep the credit with another lender?
While comparing loan quotes: How many months will it take for the higher interest rate with the builder lender (and it will be, generally) to equal the credit back? Do I expect to be able to refinance within that time? If I am counting on a refinance, are there resales in the neighborhood that will support my home’s value on an appraisal? Keep in mind that for your refinance appraisal, your home has now been occupied and will be appraised by comparing against comparable sales of occupied homes. Sometimes in very new neighborhoods where the builder is still building, this means you will have a lower appraisal for some time until other homes in the neighborhood are selling.
