A preferred lender might be best – but not always
When you’re buying a newly constructed home or having one built from scratch, you have different financing options.
You can get a mortgage loan from a lender of your choice. Or, you can opt for the builder’s preferred lender if it has in-house financing or partners with a bank.
You’re never required to use your builder’s preferred lender. And, as always, you should shop around for the lowest interest rate on your home loan so you know you’re getting the best deal.
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Homebuilding and residential construction firms sometimes offer in-house mortgage financing to their buyers. Alternatively, they may partner with a mortgage company or bank that offers home loans on new construction.
This can be a mutually beneficial partnership that works in favor of both the builder and the lender — and possibly the buyer, too.
“Many home builders have in place a preferred lender that they claim will work in the best interests of the home buyer by providing a better financing option and added convenience,” explains Realtor Jason Gelios.
“The buyer gets referred to this preferred lender through the builder, who in turn works to help get the buyer preapproved,” he explains.
So there could be perks to using your home builder’s preferred lender in terms of speed and convenience.
But, as with any mortgage, the loan needs to benefit you.
Before opting to use your builder’s recommended lender, it’s a good idea to compare rates and closing costs from a few other companies to make sure you’re getting the best deal possible on 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 one example, Gregg Cantor, president and CEO of Murray Lampert Design Build Remodel, says his firm’s preferred lender is U.S. Bank.
“We have completed many projects through US Bank loan programs, and we make it easy for the homeowner/borrower. The borrower provides the loan documentation, and we handle the builder’s package, including architectural, scope of work, interior design, and construction,” notes Cantor.
“We have found that the homeowner-lender-contractor model works well. It’s very efficient, and if done correctly everyone is protected.”
Can my builder require me to use its preferred lender?
Rest assured that you are not required to choose your builder’s in-house financing or affiliated lender.
“Builders cannot require that a buyer use their preferred or affiliate lenders. Buyers are not legally bound to any one lender prior to signing, and a builder cannot charge them a higher price for going with a different lender,” explains Robert Heck, head of mortgages for Morty.
Forcing a buyer to use a specific lender for closing on a mortgage in addition to preapproval for a mortgage would be a violation of RESPA laws.
If you don’t want to use your builder’s preferred lender, “You can refuse to sign any construction or loan documents and request that the requirements be removed from your agreement” -Jason Gelios, Realtor
“It also goes against the goal of many other fair lending regulations that were created to help make a more transparent and fair process for all home buyers,” Heck says.
If your builder tries to strong-arm you into using its preferred lender, know your rights.
“You can refuse to sign any construction or loan documents and request that the requirements be removed from your agreement. If you notice that the builder included a requirement in your purchase agreement to use their preferred lender, you can seek legal counsel to remedy the situation or walk away from the deal,” suggests Gelios.
But even if they can’t force you, don’t be surprised if your builder tries to steer you toward its preferred lender by offering incentives and deal sweeteners.
Benefits of using your builder’s preferred lender
Choosing a builder’s preferred lender can sometimes be cheaper and lead to an easier loan process.
“Choosing a preferred lender can come with incentives for the buyer, including upgrades to the buyer’s home, seller credits toward closing costs, and more,” says Heck.
“Also, when you opt for this route, your lending timeline won’t be something the builder or lender is going to hold against you. Oftentimes, in-house lenders offer very long-term rate lock periods as additional incentives that line up with your construction timeline; this flexibility is not typically offered, as most traditional lenders max out between 90 and 180-day lock periods.”
Picking your builder’s partnering lender can also save time.
“In our case, we know what the bank needs to successfully fund a loan for a new build or whole home renovation, providing a very streamlined process for the consumer,” adds Cantor.
Realtor Samantha Odo also points out that it’s in everyone’s best interests for the deal to go through when you choose a builder’s preferred lender.
“Their preferred lender is someone who will likely err on the side of approving borrowers for the builder’s project more often than a randomly chosen 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.”
Drawbacks of using your builder’s preferred lender
On the other hand, using a partnering lender can have its downsides.
“The drawbacks lie within the affiliation between the lender and the builder. When the company providing financing is the same that is building and selling the home, there’s a potential conflict of interest,” cautions Heck.
“While this does not 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 work too hard to please the builder/seller, without necessarily representing the buyer’s best interests.
“Not every preferred lender will act in this way, but when you have a lender who loves getting referrals from a builder, their service may be skewed,” Gelios says.
One of the biggest risks to saying ‘yes’ to your builder’s preferred lender is that you may 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.
Luckily, there’s an easy solution.
You can get pre-approved by a few lenders and compare their offers to make sure you’re getting the best rate.
The approval process will take a little longer for a new construction home than an existing home. But considering that a lower mortgage rate can easily save you thousands, the extra effort is usually worth it.
Why builders have preferred mortgage lenders
It’s little surprise that many contractors and building firms choose to join forces with an outside lender or offer in-house financing options. This increases the convenience factor for buyers, most of whom will end up needing a mortgage loan.
“It’s most common for builders to have an affiliated lender partner purely for financial purposes and to increase the profits from the new build and home sale. In some situations, builders may have a preferred lender simply based on who they trust or have a history of working with,” Heck adds.
Beyond financial incentives, “the builder prefers to have control over the process. The builder’s lender might work harder to get a buyer a loan and let the builder know sooner if the buyer does not qualify. It’s easy to understand why a builder would like this level of control,” says real estate attorney and realtor Bruce Ailion.
Often, these benefits work in the buyer’s favor as well as the builder’s. But if you do find a better deal, you should absolutely go with the company saving you the most money.
Your builder cannot require you to use its preferred lender — so don’t let anyone make you think otherwise. And if the lender doesn’t offer competitive rates, it’s in your best interest to look elsewhere for financing.
Truth is, your builder’s preferred or in-house lender may provide the best loan deal that saves 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 that for sure unless you do your due diligence as a borrower.
“Shopping around and comparing lenders will help you determine if the offer coming from a preferred lender is the best long-term option or if you would be better served going with a lender of your choice,” Heck recommends.