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Should You Borrow From the Builder's Preferred Lender?

Dena Kouremetis
A veteran of the homebuilding industry, Dena Kouremetis is the foremost real estate columnist specializing in new home issues, trends, products and designs. Her columns appear in the New York Post as well as other newspapers throughout the U.S.

Your brother-in-law, who just happens to be a mortgage broker, told you (repeatedly) that if you ever need to finance a house, he’s your man. He has given you tidbits of advice at family gatherings, told you where to look for homes, and kept you abreast on interest rates, encouraging you to take the plunge. You've assured him that you would most likely use him as your loan agent. After all, he’s family.

But you’re looking at new construction, and nearly every builder out there has an in-house or preferred lender they’re pushing. Not only are the on-site sales consultants talking up how great they are -- builders are also offering a chunk of play money they call "incentives" to use these works-in-a-drawer type lenders. You realize at this point that this incentive cash can take a sizable bite out of out of the money you’ll need to come up with for closing costs, AND can get you the carpet upgrade you otherwise may not have been able to add when the rest is applied towards your design center upgrades. What do you do now? Is blood thicker than credits at closing?

It’s Your Choice

The dictionary defines an incentive as, "a thing that urges a person on; a cause of action or effort; motive; stimulus." In this case, the builders are providing an impetus for their buyers not only to make a decision to buy a new home in their community, but also attach the use of it to employing their own preferred lender. It’s important to know that homebuilders cannot prevent you from using any lender you choose, be it your credit union, disembodied Internet lenders, or your brother-in-law. The simple fact remains, however, that they are not bound to offer any of their own dollars in the form of incentive monies if you do so. Therefore, the choice will remain yours, which can sometimes put you between that rock and hard spot we all know so well.

An Offer You Can’t Refuse?

Why do builders sometimes sweeten the pot for buyers to use a particular lender? In one sense, builders thrive on givens and a sense of accountability over the process. They incur a considerable amount of risk in building and upgrading a new home to a buyer's specifications. An in-house or preferred lender whose first priority is its builder accounts (not outside business), is expected to literally jump through hoops to get buyers pre-approved in a timely fashion. At the same time, the builder is "hedging its bets," so to speak, relying on the in-house lender to advise them as to whether it is prudent to take a particular home or home site off the market for a particular buyer/borrower. Lessened risk-taking plays a huge role in a homebuilder’s desire to have some control over the process.

The ‘No-Brainer’ Aspect of it to the Builder

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.

Free Enterprise in Full Bloom

It’s no secret that in-house lenders (owned by the same entity that owns a particular builder) are profit centers, such as the builder’s design center, offering at retail what they purchase at wholesale. This can be likened to businesses such as car dealerships, where it is hoped that you use the dealer's service centers and financing opportunities. You still have a choice to go outside, but may not lightly dismiss the incentives being offered, especially if they greatly affect your bottom line.

Using Your Own Lender - Your Responsibilities

Should you ultimately decide to use your brother-in-law, passing on the builder’s offer, it will be your responsibility to:

• Make sure your lender calls or faxes the builder frequently, reporting on your loan status.
• Make sure there is room in your approval for an increased sales price when financing extras (upgrades and options) for the home.
• Decide the best time to lock your interest rate. There will be no one to assist you or to fall back on if you jump the gun if rate lock expires before the house is finished. In other words, the builder will claim they have no obligation to advise you when it may be best to lock, since they are under no obligation to your lender.
• Verify when loan documents are ready to sign, based on your builder's estimate as to when the home will be complete.

Whether you ultimately choose the builder's preferred lender or brother-in-law, the key to a stress-lessened process is communication. When buyers, builders, and lenders communicate and provide documentation to one another frequently, finger-pointing can be eliminated at the crucial close of escrow, when emotions run particularly high.