Buying a New Home? Think Before Using Builder’s Mortgage Lender

Thinking of buying a new home in this softer market?

Chances are, your builder is going to try to sell you a mortgage.

Builders have long encouraged customers to use their home loan affiliate when it comes to financing, and not just to make a little extra money. It also gives them control of the transaction, making it less likely that a mortgage snafu will create problems at closing.

Now, as sales slow and cancellations rise, home builders are increasingly rolling out deals tied to using their affiliated lender. But you may well be able to find a better deal on your own.

When Randy Gowler of Olathe, Kan., wanted to buy a new four-bedroom home, the builder offered to pay the first $8,500 of Kansas mortgage payments. The catch: Gowler had to use the builder’s affiliated lender and pay the full $287,000 asking price.

Gowler crunched the numbers and turned down the deal. Instead, he went with an outside lender that offered lower mortgage rates and paid $274,000. But unlike Gowler, most home buyers stick with the builder’s lender.

Pulte Homes Inc. says Pulte Mortgage provides financing for 90 percent of its buyers who need a home loan. Centex Mortgage handles about 80 percent of Centex Corp. customers. Most big home builders either have a mortgage affiliate or a number of preferred lenders they work with.

Builders say their rates are competitive and that a home mortgage company affiliate gives them more control over the sale. Indeed, getting a loan through a builder can be a big plus if construction is delayed, says Greg McBride of Bankrate.com, because a builder’s mortgage unit is more likely to be flexible in that event.

As the housing market cools, many builder incentives are frequently thrown into an offer as a means of sweetening the pot for prospective buyers.

A September survey found sharp increases from last year in the number of builders offering to pay closing costs and other fees and in those reducing home prices.

In many cases, home buyers must use the builder’s financing arm to qualify for these offers. That’s particularly true if the incentive is mortgage-related, such as when the builder pays closing costs or picks up several months worth of mortgage payments.

Some competitors say these requirements put buyers at a disadvantage.

“They prevent consumers from shopping to see if there’s a better deal out there,” says Marc Savitt, vice president of the National Association of Mortgage Brokers (NAMB).

The savings from incentive programs are often illusory, Savitt said, as the home buyers are charged a higher mortgage rate or more in fees and closing costs by the builder’s mortgage affiliate. The builders disagree.

“This is really about special interests trying to limit competition — and increase their profits — by legislating home builders out of the mortgage business,” the National Association of Home Builders (NAHB) said in a statement.

Federal rules prohibit builders from requiring that home buyers use their mortgage affiliates. Rules also mandate that any discounts offered to buyers who use these affiliates must be true discounts and not made up through higher charges elsewhere.

The Department of Housing and Urban Development (HUD) says it is getting more complaints not only from mortgage brokers, but also from consumers. One builder canceled a purchase contract and refused to return a down payment of $11,845 after the buyer decided to use an outside lender.

After HUD intervened, the builder’s mortgage company agreed to buy down the rate to make the home loan more competitive. Another home builder agreed to waive a $5,360 origination fee hat a buyer was being required to pay in order to qualify for $13,450 in incentives.

To make sure you’re getting a good deal, ask the builder not only for the mortgage rate, but also for details on closing costs, points, any fees that will be paid to the lender or third parties, and the terms of the loan.

Whether the builder’s deal is worth taking can also depend on how long you plan to stay put. A slightly higher home mortgage rate may not be a problem if you plan to move in a few years, but it could wipe out the benefits of any incentives if you plan to stay in your home longer.

It can also pay to negotiate.

When Scott Lazaroff bought a new home in Lyons, Colo., in September, the builder offered to knock an extra $15,000 off the price if Lazaroff used its affiliated lender. He went with his own mortgage lender, but still convinced the builder to reduce the price by $10,000.

Dan Gracey, another Colorado mortgage applicant, said his builder came back with a lower rate after he “pushed back” on its original offer, which was higher than the competition.

In summation, when your builder offers you a mortgage, here’s what to do:

• Ask for a written estimate that includes the mortgage rate, points, closing costs and any fees, as well as the terms of the loan.
• Get a mortgage quote from another lender for the same type of loan that same day. Use a mortgage calculator to see how the builder’s shakes out.
• Compare the offers, factoring in both the mortgage costs and the value of any special deals tied to using the builder’s mortgage lender.