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Should I use the Home Builders Lender?

Homebuilders are offering so many incentives today, just to get your signature on the contract. They may throw in a free pool, incentives as high as $20,000.00 to $30,000.00 and no closing costs. Heck I heard one home builder advertising the other day on the radio, and they were giving away gifts worth about $100.00 just to come by and see their home models. Homebuilders are feeling the real estate crunch just like everyone else and they are playing the incentive game to sell homes, plain and simple.

Here is the catch, when you sign contract the builder usually will make it clear in writing and verbally that you must you use their "Preferred Service Vendors" to get these incentives. This means you will not have a choice on which lender to choose from. You must go with "their guy" no matter how expensive it is.

So here is the big choice, should I choose to take these incentives and pay more for lender services or, should I NOT take the incentives and work with better lending alternatives?

I talk with a lot of borrowers who come to me with this dilemma. My answer is simple: It really depends on your unique situation.

Here is what I would suggest to do:

Step 1:

First, before you ever step a foot into a new home subdivision, go seek a professional lender and get pre-qualified for that home loan. That way you know up front how much you can buy, what loan options are best for your situation and what the true costs of that mortgage. Have your mortgage lender prepare a Pre-qualification Letter.
Seek out a professional real estate agent, and get buyers representation. Most of the time a builders purchase contract can be in favor of only their interests. You want to make sure your interests are being satisfied.

Step 2:

On the first visit with the new homebuilder, it is crucial that you bring your real estate agent with you. Your agent will get you completely registered with that builder, so if you go back later to re-visit without your agent, you still have agent representation.
If you find a home you want to put an offer in on, find out what incentives are being offered. Talk these incentives over with your real estate agent and make sure these are "REAL" incentives. Sometimes the incentives they offer, do make much sense and just asking for a reduction in price might be better.
Find out if they are requiring the use of their "preferred lender". At this point I would have your agent hand the builder your pre-qualification with your lender of choice and let them know you are already approved with another lender and would want to work with that person. The builder may at that time go ahead and agree to allow that.

If they come back and state that you have to use their "preferred lender" or you will lose the incentives, then you made want to try a couple of different leveraging techniques.

Leveraging Techniques:

Leveraging technique one: Do not agree to sign any contract until they agree to let you use your lender of choice. Make them call their corporate office and check if they can make this happen. At the end of the day, the builder really does want to make a sale, and if they think you will walk away from buying, they may give in.
Leveraging technique two: Do not sign the contract until you are provided a Good Faith Estimate, Truth in Lending Disclosure and a Pre-qualification Letter from their "preferred lender". Now you have time to review the loan information from their "preferred lender". If you notice that they are not offering competitive rates, products or services, you can now call your builder again and state that you do not want to use their lender because you do not like the loan they are offering you. At this point, usually one of two things will happen. Either they will give in and let you use your own lender or make their preferred lender match your lenders fee and rate structure. Once this happens, you just need to make a final decision. At this point, either way you have won.

I have always told my clients that I cannot always beat the builders "preferred lender", but I will help my client end up with a good loan. Doing the right things for my clients is the most important thing, and if I do not end up with this loan, its ok, we will have plenty of chances to work together in the future. The last thing I ever want to see happen is a borrower go into a new home subdivision and walks out with a "BAD" loan. Then you the consumer will need to spend more money later having to refinance out of that loan. In the long run, this could be more expensive then just going with your lender of choice and losing the incentives.

We are unique people out there. We expect better then "would you like fries with that drink". I just have learned to use my Midwest values and transfer them into my mortgage business. If you are looking for something a little more unique in your next mortgage loan, please do not hesitate to get a hold of me.

My name is Gary Miljour and this is what I do best.

Gary Miljour- Mortgage Lending for Arizona and California

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Posted by Gary Miljour - Mortgage Lending for Arizona and California on 10/19/2007 06:05 PM

Comments (44)

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44 Comments on Should I use the Home Builders Lender?

OCT

2007

The builder's lenders should all be under investigation by the Feds. The "incentives" are all monopoly money.

Diane- Spoken like a true professional. LOL :-)

HUD should look into these practices. If they are not a violation of RESPA, they ARE against the spirit of it.

This is timely for me as a development is offering 10k credit on my own purchase if I use CountryWide. I feel this is an amount of money that should be part of the negotiation now, regardless if I use them or not. It does a little strange to me to be able to offer that only if I use their guy.

I appreciate the post, thanks!

I agree with David...RESPA says you cannot offer an item of value to "coerce" them into doing business with you.

I was talking to my lender about this recently and he said it would take an act of Congress to stop this behavior. Sometimes you can negotiate with the builder and get your lender to do everthing and get all the incentives.

Not to take sides for the builders, but it is easier for the new home sales agents to keep track of the buyers when the majority of the loans are with one lender. Try keeping track of 30+ sales with 30 different lenders at one time.

David- The builders are really working into a grey area.

Julia- This is a very grey area, some state are investigating builders on this issue, only time will tell on that issue.

Stacy- I agree the key is to negotiate. Builders do not want to lose clients.

Paul- I have to totally disagree with this thinking. I know Realtors and Lenders who can handle this workload, and they did not all come from the same place. I understand the builders position, since his money is at risk, but some of the builders "preferred lenders" are just not competitive. If the builders want to keep the loan in house, then they need to make sure their lending arm is being competitive with rate and price.

I always wonder how the $20K in free upgrades don't add 1 penny to the value. The appraisals seem to come in right at contract price(hint: it barely made it)

Gary, new home builders that have a sister mortgage company really want the loans blanketed. The truth in lending statement is required immediately; give it to the lender that is your first choice. If there are blantant fees that can be clearly articulated to the consumer, and the incentive isn't enough to make sense, USE YOUR LENDER OF CHOICE FOR HEAVEN'S SAKE. If, however, your price discount is WAY in excess of the cost of the builder mortgage company, your choice is tough. I like this post because you are making it clear that THIS NEEDS TO BE REVIEWED by the lender of choice because not understanding the loan costs is worse than not getting the incentive, in some cases. Great post!

I have seen builder's choice lenders offer some pretty good deals. And I have seen some that were trash. And the ones that were trash almost dripped sincerity. I have seen builder contracts that were better than the association contracts for the buyer, and I have seen builder contracts that put the Sopranos to shame.

This is an excellent post. I sell new homes and the matter of the builder's lender is always a factor in making an offer. Yes, we do make offers these days.

My procedure is to find the home and lot that we want, then have my buyers pre-approved by the builder's lender PRIOR to signing anything beyond a lot hold. Then I shop the lender's GFE. If they are far above market, which they usually are not in my area, we negotiate with the builder's lender to come more in line with market. Or, we get additional incentives from the builder to compensate for additional fees or higher rate from their lender.

I have to disagree about builders working with 30 different lenders. Buyers these days have access to some of the worst lenders ever on the Internet and a builder cannot begin to follow some of these jokers. I believe that things go much more smoothly with the builder's lender. I just don't want my buyer to pay extra for the pleasure of using the builder's lender.

I appreciate the suggestion of recommending that the buyer go to the builder with a buyer's agent. Many buyers to not use the services of an agent thinking they can make a better deal without one. HA!!!! They don't use an agent, then we hear the horror stories afterwards. I tell folks that a buyer going to a new home builder without an buyer's agent experienced in new home sales is like a lamb going to slaughter.

New Homes are my speciality. We usually go with the builder's lender. I just make sure my buyer doesn't pay any more.

By the way. This matter of tying the incentives to the loan and title company is in litigation and things could change in the future.

Tom- It always amazes me how carpet I can buy aa Home Depot for $1.25 a square foot installed nows cost me $3.25 a square foot when my client orders it as part of their incentives. LOL :-)

Laurie- Clients just need to be educated and prepared when walking into a new home subdivision.

Lane- I 100% agree, that there are good and bad builders out there.

Great post glad to see it as a feature. This is a real issue in all of our markets.

We are actually building a new home right now and were preapproved before we even looked at homes. Here are a couple things in my experinece with new home builders:

1)In Florida, where I lived for four years and was an agent, builders would pay ALL of your closing costs, save pre-paids, if you used their lender. This was always a good deal because there would be no "higher than normal" fees. My buyers only really had to bring their down payment and that was it. I never ran into a problem...rates were very competitive too.

2) In Minnesota, if we used the builders preferred lender, they give you so much money toward closing costs. Of course this is more prevalent right now with the market the way it is. For instance, the builder we went with was giving $7500 to closing costs which could be used for anything. The GFE showed the fees and they are competitive with what we had with an outside lender. We told them we wouldn't buy the home unless they bumped the price up to $10,000. The model agent told us we wouldn't get it, but we told her we had no problem walking. Ten minutes later upper management took our offer. So now almost all our closing costs are paid for.

The key is just doing your home work and running the numbers. If the number make sense, and the builder's affiliated lender is not taking advantage, then most of the time it all works out good for the buyer. I see no RESPA problems as they are never forcing you to use their lender.

Great post Gary, I frequently see buyers crying the blues becasue they thought the builder was on their side. They forget that in business the client in most cases finds them selves in an adversarial position. Thanks for looking out for your clients. Too few do!!

OCT

2007

It is interesting how many builders appear to dance around RESPA while telling the public to use "their lender" and "their title company." If not, you don't get x.. Not an inducement? OK.. So it makes it "easy" when they all share a building etc but does the public really think this is always in their best interest? Fact is, it is normally the builder that benefits from these "relationships" more than the buyers benefit from the incentives..

As far as incentives here in the valley, Gary, have you noticed the builder "giving" a Lexus with the purchase of a new home? Haven't seen how that fits on a HUD-1 yet. :-)

Don't get me wrong.. I think some of the builders and their "teams" do a great job. As in any business, you get some good, some not so good..

Awesome post - I couldn't agree more. I am dealing with builders more and more, and have always been frustrated by their idea of incentives. The #1 question I get from buyers is "Why do I need you to help me purchase a home from a builder?" If they only knew!

Lenn- It sound like you do the very best for your clients. Its so important that the client understands what they are dealing with. The key is that you help your clients get a competitive deal from the builders lender. Great Job.

Rebecca- Yes I think we see this issue in all markets, and I think Arizona is worse then most just due to the amount of new construction that goes on here.

Jennifer- The RESPA issue is a very grey area. It's the incentives tied to service providers that is becoming a point of litigation in many states. Otherwise, I agree if the builders lender is offering a competitive rate and the fees then most of their clients will be satisfied with the outcome. I do know, some clients who do not want to work with the builders preferred lender. Maybe its a service issue? I just want the consumer to know that they can get educated about the process before walking into a new home subdivision.

Darrel- This is exactly what happened to a client of mine. Attached is my last post about this. Homebuilders and Abusive Practices

Nick- I have to agree with you 100%. I think everyone needs to understand our local Phoenix Market, to understand the frustrations that our clients deal with here when dealing with home builders and their preferred service providers. I have a feeling it does not operate like this everywhere else in the United States. I also still do not buy into the argument that it works out better for the clients if the builder works with one lender. I good lender is a good lender, no matter if its their internal preferred lender or an outside lender. I just want the consumer to make the choice. Great comment by the way.

PS. The Car thing is a joke, and I wonder the same thing.

Leigh- Now you have information to share with your client. Print this post off for them and also this one.

Homebuilders and Abusive Practices, the more we educate our clients, the less we will hear about horror stories out there.

Gary, good post. I, too, work in this market, and the builders are trying everything they can to entice the buyers and the Realtors. Like Lenn, I have my buyers prequalified with a lender, and they can then compare fees, costs with the builder's lender. Usually my buyers to choose the new home lender. Their incentives are astounding these days.

Thanks for sharing! I will certainly share both of these great articles with my new home buyers!

Teri- Maybe I have been in the real estate business too long, but your name and reputation in the east valley has always been positive. Just keep up the good work.

PS, did you ever work for Coldwell Banker Success Realty?, too many years.

Leigh- great

GARY: We don't have a lot of new construction on Long Island, but this is great advice for those that are thinking about buying new construction anywhere. I have seen some incentives like a car being given away with the purchase in a few instances here though. Good post, Gary!

Gary, I have to say from the title of the post I was ready to blast you... I am so glad I read the post first. You really wrote a great post and I am glad they featured it. You gave some great info. Congrats on the feature.

Gary - I have approached the problem from a different angle. I do have my buyers speak with a lender prior to making an offer on a new home. We never discuss the lending source specifically. I work very closely with the builder to squeeze every incentive I can out of him.

Once we agree on deal, they usually are prepared to move forward. My clients make application with their lender. The lender usually offers a mortgage at just around market rates, but always includes a 1 point rate buydown.

I make sure my clients decline the buydown and accept the loan at a higher rate. Settlement occurs and 3 days later, my clients refinance the transaction with a no cost refi from the lender they initially spoke.

I have had several clients purchase new homes in this fashion and they have all been happy to go through the paces to take advantage of all the incentives.

Gary, this is excellent. There is a chapter in my book about working with homebuilders and I address this question directly. However, your response is much better than mine! I'm currently working on the next edition of the book and would love to use your material, with full credit to you, including a little bio in my Contributors section. Interested?

Adam- As Nick stated above, I am still trying to figure the car thing out. Thanks for the comment.

As far as incentives here in the valley, Gary, have you noticed the builder "giving" a Lexus with the purchase of a new home? Haven't seen how that fits on a HUD-1 yet. :-)

Matthew- Its hard to judge a book by its cover sometimes. Thanks for the nice comments.

John- I think you approach makes sense, but is the refinance at the end actually benefiting your client due to them having the pay closing costs twice?

Jennifer- Wow, I would be honored to have any of this information used as a reference in your next book. The way I see it, is we all (out industry) need to work together now then ever and educate the consumer. So yes, just email me and I would be happy to do that for you. Thanks for such a nice comment.

Very Good Gary!!!! Around large cities there is not too much room left for new development, but in your area, as in mine, they are breaking new Earth all of the time. Fantastic and very well thought out entry!!

All My Best

Connor MacIVOR
www.Paris911.com

Good post Gary-thanks--mike

Gary, Awesome information an old friend once told me "The Devil is in the details" and most people just do not read those builder contract. They are way in the favo of the builder not the buyers.....

AHhh midwest values in the southwest real estate transaction! What a breath of fresh air Gary AND to top it off I totally agree with you 100% on all points. Don't find yourself a foreclosure statistic because you will lose some of these "incentives". Make sure you get locked in a great product that fits your long term housing & investment goals!

I worked for a production builder and the "incentives" used to push people to use their lenders are normally pretty strong. Normally the builder owns a portion or all or the mortgage company and if they don't there is usually an agreement where the builder will receive a portion of the income from the loan. It all boils down to money: if the buyer can negotiate a good loan and get the incentives, then use their lender. If not- use your own.

I have seen some builders up this way offer those incentives. Like other comments I am supprise the Feds have not gotten involved for RESPA violation. I have seen cases where at closing loans types were changed. I have also seen cases where the loan closed dispited the fact that the builder had not yet recieved an occupancy permit. Using an independent lender is always my recommendation. On that line consider the Inhouse lenders that are working with a number of brokerages.

Excellent post. I hate having to go back and forth with builders over the "preferred" lender and closing cost. I've always felt like it was questionable. Of note, I live in a neighborhood built by a large national builder. Within the last 2 months there have been at least 5 foreclosures or short sales that I know of in my section the the neighborhood (my section is about 100 homes out of a 600 home community). It's got me wondering what kind of loans they got put on and why they didn't ask for help before losing their home. Clearly there's a problem here.

OCT

2007

Connor- Thanks for the great feedback.

Mike- You are welcome.

Doug- That old saying "buyers beware" is so true.

Renee- I had a client come to me recently to refinance his 2/28 arm he took out with the builders lender, and he owes too much on the house to refinance. They are struggling with the new payment. The client stated that the lender at the time never even mentioned a fixed rate option.

James- I think the buyer should be able to make the choice on the lender and not worry about losing incentives if they do chose an outside lender. If the client wants to use the builders preferred lender because they have a more competitive rate, fee structure and better service, then so be it, it is a competitive market out there. However forcing people to get incentives it just bad policy.

Tim- I am also surprised that the Feds have not gotten involved for RESPA violations.

Brandon- Just so the builder can have a little more control of the transaction is the best way to answer the question. Now, some homeowners are paying for it with foreclosures.

First, as you stated, a Buyer needs Buyer Representation with a reputable Buyers Agent. Also, as you stated, the Buyer needs to speak with their own lender that the Buyer is comfortable with. Then, the Buyer should move forward with the Buyer Agent and their lender. I would encourage the Buyer to not consider the incentives when looking at the property for the first time. If the Buyer really likes the property, then upon making a serious offer, I would ask for the incentives without using the Builders vendors. If the Builder truly needs to sell, a meeting of the minds will come together. At least the Buyer will not feel pressured to use another vendor.

Great post and good reading. In my market it is possible to get all the incentives and still use your own loan whereas a year ago that was not the case.

Good post. In our area the biggest problem is getting the new home to appraise. If the builder's lender is a third party they usually have a dog in the fight namely, spreading the builder's debt to as many individuals as possible to reduce their risk, and these banks have a way of squeezing appraisers. The buyer using his own lender may have appraisal issues which the builder has to clear up in order to make the sale work. You offer some great help to remedy that and put the buyer back in control.

Rick- I agree 100%, if the builder wants to sell, a meeting of the minds with happen.

Keith and Robin- It is also getting easier to use outside vendors and still get the incentives.

Dan- I have been hearing that appraisal issues are becoming problems everywhere where increased foreclosures out there.

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Hi Gary,

Great post. This is a real issue in all of our markets. Keep posting... Merry Christhmas

Best - Sash

Sash,

I am glad to hear that this information is helpful. Builders are so much fun to work with!

FEB

2010

This should have been required reading for each home-buyer. I have been waiting for a mortgage decision from the preferred lender (Wells Fargo) for 6 months. I wish I would have read this before hand.

Carlos- At least you are now getting the facts and I wish you the best. At least my industry is finally cleaning house.

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Tempe, AZ

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