Should I Borrow From My Builder’s Preferred Lender?

24 Apr Should I Borrow From My Builder’s Preferred Lender?

Almost without exception, every home builder has a “preferred lender” from whom the builder hopes you borrow your money, and incentives abound to sweeten the deal. Despite these sweet treats, is the “preferred lender” the right choice for you?

The housing market “correction” has been in full swing for just over a year, and all the experts are screaming the same message, “It’s a buyer’s market!” Bankruptcy attorneys are seeing a record number of foreclosures, especially from buyers who purchased new homes or refinanced existing homes just a few years earlier. So, we’re screaming, “Buyer beware!”

A major reason behind the spike in foreclosures is the “resetting” of the borrower’s interest rate at the end of the “teaser” period. For a buyer caught up in the moment of chasing the American Dream of home ownership, the short-term goodies often distract buyer from analyzing the terms of the loan. As the saying goes, “The devil is in the details.”

Why does a builder prefer one lender over another? For starters, the lender is often a subsidiary of the builder. For example, Centex Corporation builds homes, but it also sells mortgages, title insurance, homeowners insurance and even pest control services. This creates an advantage for the builder because all the supporting characters always work together. As real estate columnist, Dena Kouremetis, points out,

The in-house or preferred lender is usually already in the possession of all the necessary public reports, homeowner’s association paperwork (if applicable), master government appraisals for FHA and VA loans, and already understands the builder’s purchase agreements and addendums, so that there isn’t any last minute scrambling at closing time. The builder can hold its own lender accountable for providing the final dollars to its qualified buyers, and ultimately to itself, making it possible to lessen the carry-time on a new home.

The well-oiled machine aspect of this manifested when the builder’s salesperson, the construction superintendent, the lender, and the design center personnel are gathered at frequently-held status meetings, literally placing all of these important entities on the same page at the same time.

However, the greater incentive for the builder to steer you in-house is profit. Using the Centex example, one company is making a profit on the house, the mortgage, the title insurance and the homeowner’s insurance premiums. All from a single purchase! There really is no problem with this, as long as price, product and service are competitive.

How does an “unsophisticated” buyer know if the deal is good? The trick to properly evaluating the preferred lender’s offer is to get a Good Faith Estimate, which is a standard form that discloses all of the fees and costs and major terms of the loan. Other lenders will provide identical forms, allowing the borrower to compare “apples to apples.”

The borrower must also compare the offers with his specific circumstances. For instance, how long is he intending to reside in the house? If the borrower intends to move again in just a few years, the short term incentives offered by a builder might be the smarter move. However, if the buyer intends to live in his new home for a longer time, his focus should definitely be on the long-term cost of the prospective lenders, and generally speaking, the preferred lender is the wrong choice.

Getting a good deal at closing may be a ticking time bomb that explodes years down the road, leading to the eventual foreclosure of a dream home. The borrower can avoid this catastrophe by doing a little homework and passing up short term pleasure for long term stability.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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