Wrong Mortgage Can Be Catastrophic Mistake
Much of the fun in buying a new home comes from being able to choose the upgrades that tailor it to your tastes. But getting the wrong mortgage to do so makes it hardly worth the fun.
Want steam vents in the shower? Not a problem. With a signature, they’re yours. For now, at least, many builders are offering such things at no extra cost.
Usually, though, there’s a condition: The builder will pick up the tab only if you get your mortgage through its preferred mortgage lender.
Why not go along? The loan officer may even be right there in the showroom, on a weekend, no less. A mortgage with freebies is better than a home loan without them, right?
It’s not quite so simple, of course. A smart consumer will want to know that the home loans being offered by the preferred lender are truly competitive with the loans available on the outside.
Taking out the wrong mortgage can be a very expensive mistake over the long term - a lot more expensive than those steam vents.
Moreover, you won’t know if the lender’s offerings are overpriced, whether in terms of interest rate, prepaid interest (known as points) or loan-related fees, unless you’ve already talked to outside lenders.
Home builders can’t force you to use any particular lender; federal law prohibits it. Nor can they dictate whom you must use for other settlement services, such as the title company or homeowners insurance provider.
Lenders can also choose who will perform the appraisal.
Home builders’ incentives these days can be worth tens of thousands of dollars.
When that kind of money is at stake, does using the builder’s preferred lender really remain optional? Or is it an offer you can’t refuse?
That is a gray area under the laws governing real estate settlements, said Brian Sullivan, a Department of Housing and Urban Development spokesman.
“This puts a burden on shoppers to look past the granite countertops and stainless steel appliances and try to determine if there’s a real discount or mere puffery,” Sullivan said. “You’ve got to shop.”
Federal law prohibits kickbacks of fees or perks among lenders, mortgage brokers, title companies or others involved in a real estate deal.
However, if a builder has an ownership stake in a lending business, the builder can share in the profit. That ownership stake has to be revealed to you early in the deal, when the builder first makes the referral.
Ryland Homes, to use one example, has its own in-house home mortgage loan company, Ryland Mortgage, which deals only with people borrowing to buy a home built by Ryland.
Brookfield Homes, the company offering as much as $100,000 in concessions, owns a mortgage subsidiary called the Mortgage Group.
Although the law says builders can’t force you to use their in-house home loan lender, nothing says they can’t do their best to entice you… to keep all your business under their roof.
Indeed, as long as the loans they offer are truly competitive with what you can get outside the showroom, applying for a mortgage with the approved lender could be the way to go.
One reason home builders have these mortgage loan arrangements is so a lending snafu won’t delay the closing.
“They want control of us,” said Stuart Tyrie, a vice president with Wells Fargo Home Mortgage, one of the nation’s largest new-home lenders.
Lenders who specialize in new-home loans are used to dealing with the uncertain timetables associated with construction.
On average, nine months pass between the mortgage application and delivery of the finished home, according to Tyrie.
With a new condo building, that time could stretch well past a year, as developers often delay the start of construction until they have sold a given number of units.
What if mortgage rates blip up to a level you cannot afford? For a fee, Wells Fargo allows borrowers to lock in their interest rate for as long as two years, awaiting delivery of their new home.
That kind of home loan rate protection is an important benefit if you have a contract to buy a property with an uncertain delivery date.
Get actual mortgage quotes from a couple of lenders and compare the kinds of home loans they offer — before you tour model homes.
“A borrower needs to get a good faith estimate” or a non-binding list of closing costs “from a mortgage lender outside of the builder’s relationship and make sure the program the builder is offering is in their long-term interest versus over the short term,” said Mike Bradshaw, executive in charge of Bank of America’s partnering with builders and real estate brokers.
And if you can find a better mortgage deal outside the builder’s showroom, try to negotiate with the builder to give you those incentives anyway.
If you have a rock-solid home loan approval in hand and you’re a ready and willing buyer proven to have enough money to swing the deal, a builder could find that to be an offer he cannot refuse.
SOURCE: Houston Chronicle