A Preferred Lender Might Be Best – But Not Always
When you buy a newly built home or have one built from scratch, you have different financing options.
You can get a mortgage from a lender of your choice. Or, you can go with the builder’s preferred lender if they have in-house financing or a bank partnership.
You are never obligated to use your builder’s preferred lender. And, as always, you should research the lowest interest rate on your home loan so you know you’re getting the best deal.
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About Builders’ Preferred Lenders
Home and residential building companies sometimes offer in-house mortgage financing to their buyers. Alternatively, they can partner with a mortgage company or a bank that offers home loans for new construction.
It can be a mutually beneficial partnership that benefits both the builder and the lender – and perhaps the buyer as well.
“Many homebuilders have a preferred lender in place that they believe will work in the buyer’s best interest by providing a better financing option and added convenience,” says the realtor. Jason Gelios.
“The buyer is referred to this preferred lender through the builder, who in turn works to get the buyer’s pre-approval,” he explains.
So there could be advantages to using your builder’s preferred lender in terms of speed and convenience.
But, as with any mortgage, the loan must benefit you.
Before you go with the lender recommended by your builder, it’s a good idea to compare the rates and closing costs of a few other companies to make sure you’re getting the best possible deal for your new home.
How Preferred Lenders Work
A builder’s preferred lender will have a working relationship with the construction company. They should be able to streamline the home buying process by approving construction plans and offering the borrower a rate lock that will last until construction is complete.
To give an example, Gregg Cantorpresident and CEO of Murray Lampert Design Build Remodel, says his company’s preferred lender is US Bank.
“We have done many projects through American Bank loan programs, and we make it easy for the owner/borrower. The borrower provides the loan documentation and we take care of the builder’s file, including architecture, scope of work, interior design and construction,” notes Cantor.
“We have found that the owner-lender-entrepreneur model works well. It’s very effective, and if done correctly, everyone is protected.
Can my builder force me to use their preferred lender?
Rest assured that you don’t have to choose home financing or your builder’s affiliate lender.
“Builders cannot require a buyer to use their preferred or affiliated lenders. Buyers are not legally tied to any lender until signing, and a builder cannot charge them a higher price for choosing a different lender,” explains robert heckmortgage manager for Morty.
Forcing a buyer to use a specific lender to arrange a mortgage loan in addition to pre-approval of a mortgage loan would be a violation of REPA laws.
If you don’t want to use your builder’s preferred lender, “you can decline to sign any construction or loan documents and request that the requirements be removed from your contract” —Jason Gelios, Realtor
“It also defeats the purpose of many other fair lending regulations that were created to help make the process more transparent and fair for all homebuyers,” Heck says.
If your builder tries to force you to use their preferred lender, know your rights.
“You can refuse to sign any construction or loan document and request that the requirements be removed from your agreement. If you notice that the builder has included a requirement in your purchase agreement to use their preferred lender, you can seek legal advice to remedy the situation or opt out of the agreement,” suggests Gelios.
But even if he can’t force you, don’t be surprised if your builder tries to steer you towards his preferred lender by offering you incentives and sweeteners.
Benefits of using your builder’s preferred lender
Choosing a builder’s preferred lender can sometimes be cheaper and make the loan process easier.
“Choosing a preferred lender can come with incentives for the buyer, including home improvements for the buyer, seller credits for closing costs, and more,” Heck says.
“Plus, when you go this route, your loan schedule won’t be something the builder or lender will hold you back. Often, internal lenders offer very long-term rate lock-in periods as additional incentives that align with your construction schedule; this flexibility is generally not offered, as most traditional lenders maximize foreclosure periods between 90 and 180 days.
Choosing your builder’s partner lender can also save you time.
“In our case, we know what the bank needs to successfully fund a loan for new construction or a complete home renovation, providing a very streamlined process for the consumer,” Cantor adds.
Real estate agent Samantha Odo also points out that it’s in everyone’s interest to get the deal done when choosing a builder’s preferred lender.
“Their preferred lender is someone who is likely to over-approve borrowers for the builder’s project more often than a random lender,” Odo says.
“When a lender has a good relationship with a builder, it’s usually because they work well together, have a good process, and enjoy higher approval rates.”
Disadvantages of Using Your Builder’s Preferred Lender
On the other hand, using a partner lender can have its drawbacks.
“The disadvantages lie in the affiliation between the lender and the builder. When the company providing the financing is the same one that builds and sells the house, there is a potential conflict of interest,” warns Heck.
“While that doesn’t necessarily mean a buyer will receive a worse offer or interest rate, it is a reason for caution,” he says.
Consider that the preferred lender may be working too hard to please the builder/seller, without necessarily representing the buyer’s best interests.
“Not all preferred lenders will act this way, but when you have a lender who likes getting referrals from a builder, their service can be skewed,” says Gelios.
One of the biggest risks of saying “yes” to your builder’s favorite lender is that you might not get the best loan deal. You could end up paying a higher interest rate with worse loan terms than if you had shopped around and compared offers from various lenders.
Fortunately, there is a simple solution.
You can be pre-approved by a few lenders and compare their offers to ensure you get the best rate.
The approval process will take a little longer for a new home than for an existing home. But since a lower mortgage rate can easily save you thousands of dollars, the extra effort is usually worth it.
Why builders have preferred mortgage lenders
It’s no surprise that many contractors and construction companies choose to partner with an outside lender or offer in-house financing options. This increases the convenience factor for buyers, most of whom will need a mortgage.
“It’s more common for builders to have an affiliate lender partner purely for financial purposes and to increase profits from new construction and home sales. In some situations, builders may have a preferred lender simply based on who they trust or have worked with before,” Heck adds.
Beyond the financial incentives, “the manufacturer prefers to have control of the process. The builder’s lender could work harder to get a buyer a loan and let the builder know sooner if the buyer doesn’t qualify. It’s easy to see why a builder would want this level of control,” says the realtor and realtor. Bruce Ailion.
Often these benefits work in favor of the buyer as well as the builder. But if you find a better deal, you should definitely choose the company that saves you the most money.
Your builder can’t force you to use their preferred lender, so don’t let anyone tell you otherwise. And if the lender doesn’t offer competitive rates, it’s in your best interest to look elsewhere for financing.
The Bottom Line: Should You Use Your Builder’s Preferred Lender?
The truth is, your builder’s preferred or in-house lender can offer you the best loan deal that will save you the most money and time.
They may offer incentives, a longer rate lock, and/or a lower interest rate than competitors. But you won’t know for sure unless you do your due diligence as a borrower.
“Shopping around and comparing lenders will help you determine if offering a preferred lender is the best long-term option or if you would be better served with a lender of your choice,” recommends Heck.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.