November 6, 2000
"The broker at the builder�s
office where I am purchasing a home told me that I had to take my loan from her.
Can this be true?"
No. While the builder can require that
you be qualified by his preferred lender, you are free to borrow from whomever
you please.
"The builder said that he had
gone to great trouble getting his houses approved by the Federal Housing
Administration. And that I would be foolish if I did not take advantage of the
favorable terms available on FHA loans from his associated lender. Is he
right?"
Maybe, maybe not, depending on whether
you need an FHA-insured loan to buy the house.
Builders targeting moderate-income
home-buyers often find it useful to have their homes approved by FHA. FHA
eligibility expands their market to include potential buyers who can�t make
much of a down payment and don�t have good credit. If you are one of those, go
with FHA.
But if you can put
5 percent or more down or have good credit, you have no reason to pay the higher
mortgage insurance premiums on an FHA. Shop for a conventional mortgage.
Even if you do need
an FHA, you need not take it from the builder�s preferred lender. The interest
rates and points on FHA mortgages are set by the market, not by the government.
To protect yourself you need to check the preferred lender�s quotes against
those available from other sources.
"My builder
says I can get a loan anywhere, but strongly advises using his preferred lender
who has agreed to provide below-market prices to the builder�s customers. Is
this on the level?"
Quite possibly.
Marketing expenses are very high in this market, and a lender who is offered an
assured block of loans by a builder can afford to shave the price.
However, there can
be no assurance that the price break extends across all mortgage programs and
market niches � in fact, I would be surprised if it did. Once again, prudence
demands you check price quotes against other sources.
"I have contracted to purchase
a new home for $210,000 from a large builder. The builder has offered me a
$10,000 credit toward mortgage settlement costs and appliances if I take my loan
from his preferred lender. I�m suspicious of this kind of arrangement and want
to be free to shop for the best deal on a mortgage�Is it likely that I can
find a mortgage from another lender that will be worth $10,000 more than the
mortgage I get from the builder�s lender?"
No. But that doesn�t mean you accept
without argument whatever the preferred lender offers.
Builders cannot require buyers to use
preferred lenders, but they can make this a condition for obtaining concessions.
Builders will do this when they have a financial interest in the lender. Large
builders especially are likely to have affiliated lenders.
Since the builder will include
the concession in the price of the house, once you agree to the price you are
going to find it difficult not to deal with the preferred lender. The
lender can charge you an above-market rate or points, but with the concession
you will still be better off than if you financed elsewhere.
Suppose the builder
pads the sale price by $5,000, but offers a concession of $5,000 if you use the
preferred lender. The lender
can price the loan, say, $3,000 above the market.
If you take the loan, you are ahead by $2,000, relative to turning it
down. But you are out $3,000
compared to what you would have had to pay if the builder had no preferred
lender and didn�t pad the sale price.
The
only way a buyer can avoid this trap is to refuse deals that tie concessions to
use of a preferred lender. Offer
the builder the ask price less the concession.
Copyright Jack Guttentag 2002
