Beware of Builders Bearing Gifts and Pushing Lenders

By Elizabeth Razzi
Sunday, April 22, 2007

So much of the fun in buying a newly built home comes from being able to choose the upgrades that tailor it to your tastes. Want steam vents in the shower? No problem. With a swipe of the pen, they're yours. And for now, at least, many builders are offering such goodies 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 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 mortgage without them, right?

It's not quite so simple, of course. A smart consumer will want to know that the loans being offered by the preferred lender really are competitive with those available on the outside.

Taking out the wrong mortgage can be a very expensive mistake over the long term. An expensive mortgage could cost more than the real value of steam jets and granite counter tops. And you won't know if the preferred 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.

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 homeowner's insurance provider. (Lenders can choose who will perform the appraisal.)

Builders' incentives these days can be worth tens of thousands of dollars. Just last week, Fairfax-based Brookfield Homes mailed a flier to my home (or to the "current resident") touting as much as $100,000 in incentives on its single-family houses in Virginia. Among the incentives "current resident" could choose were financing at 1.5 percent interest, two years of paid homeowners association dues or upgrades such as a finished basement or finer floor coverings.

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 federal laws governing real estate settlements, said Brian Sullivan, a spokesman for the Department of Housing and Urban Development.

"This puts a burden on shoppers to look past the granite countertops and stainless steel appliances and try to determine if there is a real discount or mere puffery," Sullivan said. "You've got to shop."

Federal law prohibits kickbacks of fees or valuable perks among lenders, 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 profits. That ownership stake has to be revealed to you early in the deal, when the builder first makes the referral.

Ryland Homes, for example, has an in-house mortgage 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 lenders, 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 of the reasons builders have these 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 largest new-home lenders in the country. Among the local builders with whom Wells Fargo has preferred status are Winchester Homes, Craftstar Homes, and Miller and Smith.

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 loan 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 interest 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. (Other lenders who cater to the new construction market offer similar deals.) That kind of interest-rate protection is an important benefit if you have a contract to buy a property with an uncertain delivery date.

Get actual rate quotes from a couple of lenders, and compare the types of loans they offer -- before you tour model homes.

"A borrower needs to get a good faith estimate" or a nonbinding list of closing costs "from a 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, the executive in charge of Bank of America's partnering activities 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 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.

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