If you’ve been looking at purchasing new construction, you may be aware that many of today’s builders have their own lender, or one or more preferred lenders to whom they refer buyers. But do you have to use their lender? And is it a good idea? The short answers are, “No,” and “Maybe.” Let’s dig in further.
First, let’s look at the law.
A builder can’t require you to use any specific lender, nor can they charge you more for the home you are buying for not using their preferred lender. They can, however, make it appealing to you to use their lender by offering incentives.
About those incentives.
The builder’s preferred lender may not have the lowest interest rate (more on that later). But they do have the flexibility to add incentives that may make using their lender worth it. That could mean throwing in thousands of dollars in appliances, upgrading your countertops or floors, including backyard landscaping, or helping with closing costs—all of which is enticing when buying a new home filled with “builder basic” items. Incentives can be worth up to 2–3% of the price of the home.
Are the rates better?
Back to the rates. “Those builder perks might have some strings attached,” said LendingTree. “Perhaps the preferred lender’s mortgage interest rate is higher than average, or the origination fees cost more.”
Yes, the incentives being offered may be hard to resist, but it’s important to see past them in order to decide whether it’s worth for a higher interest rate. “It’s not always clear whether the builder’s package is a better deal than a loan from another lender without the incentive,” said NewHomeSource. “That means buyers must shop around and compare lenders’ offers. The interest rate is for 30 years and the difference (of a lower rate) versus the incentive can be quite substantial.”
In fact, according to LendingTree’s latest Mortgage Rate Competition Index, “The typical homebuyer could see a lifetime savings of nearly $30,000 on a $300,000 loan by shopping around for the best mortgage interest rate. That savings amount represents receiving a mortgage annual percentage rate that is 0.64 percentage points lower than the competition.
Other reasons to use a preferred lender.
Here’s another advantage to going with a builder’s preferred lender: You may also save time and streamline the homebuying process. “When you buy from a builder and use a lender who is not familiar with the development in which you are buying, there could be delays and confusions regarding closings costs,” Deb Holloway, a senior loan originator with Christensen Financial Inc., told Bankrate. “If you have a lender that is unfamiliar with this particular builder and doesn’t do his due diligence, it could result in thousands due at closing if the buyer is not aware of it.”