Home purchaser should approach a builder-lender with caution

WASHINGTON — It would be folly for new home buyers not to at least consider using the mortgage company affiliated with their builder. After all, new research shows those who use the in-house lender are more satisfied with the experience than those who go elsewhere for financing.

But it would be just as foolhardy to take what the builder offers in the way of financing without first looking around to see what else is available in the market. Marc Savitt of the National Association of Mortgage Brokers says you might be very sorry — very sorry, indeed — if you don’t shop before you sign.

“If people shopped around, they would find that they are not getting such a good deal,” says Savitt, a Martinsburg, W. Va., broker who is president-elect of the 25,000-member NAMB. “We have found that (buyers who use the builder-owned mortgage company) are paying rates 0.5 percent to 1.5 percent higher.”

That’s not what the latest survey of 50,000 buyers by J.D. Power and Associates shows. Rather, the study, which generally gave builder-owned mortgage operations high marks, found that the majority of buyers who opt to obtain funding through the builder do so because of competitive rates. They also claimed the process was easier and more seamless.

“They are more satisfied than when they use a direct lender, and that makes sense,” says Paula Sonkin, vice president of the real estate and construction industries practice for the Westlake Village, Calif.-based marketing information firm.

“When loan officers work for the builder, they can more easily coordinate the entire experience,” Sonkin explains. “Builders continually complain that direct lenders often drop the ball by losing important papers or missing closing deadlines.”

J.D. Power also pointed out that builders traditionally offer price reductions or lower rates to those who use their in-house mortgage firm. It said some are offering “more unusual incentives,” such as waiving homeowner association fees for a limited period or throwing in golf-club memberships.

“Some builders are pretty creative,” Sonkin points out, noting that one offered a “free backyard swimming pool.”

J.D. Power’s 11th annual survey of overall satisfaction with builders is a peek into the experiences of buyers who stay in-house for their loans. The study covered buyers who have been in their homes from four to 18 months in 24 major markets, so it is pretty extensive.

However, this was the first time the research firm measured satisfaction with the lending aspect of the transaction. So there is no way to tell whether the current crop of respondents is happier, unhappier or just as happy as those who went before.

But given the nature of the new-home market over the last year or so — with builders making substantial price concessions and throwing in all manner of giveaways, including (but not limited to) below-market loan rates, help with closing costs, options and upgrades, even new cars and boats — it would be difficult to find anyone who wasn’t more than happy with the experience.

Not! At least not to NAMB’s Savitt, who calls the survey findings “a bunch of baloney” and claims to have hundreds of examples of buyers who believe they were taken by their builder-lender.

“There’s nothing for nothing. There’s no free lunch,” Savitt says. “The incentives are illusionary. People don’t understand that in most cases, the home buyer ends up paying for his own incentives in the form of higher rates and closing costs. And it’s worse now than it’s ever been. Even in today’s market, this absolutely holds true.”

Savitt and the NAMB have repeatedly argued that it is illegal under the Real Estate Settlement and Procedures Act to recoup the cost of “free” incentives elsewhere in the transaction, and a violation of the Federal Trade Act to offer incentives only to those borrowers who use the builder’s mortgage affiliates. “If they offer to one buyer, they have to offer to all,” he says.

“The whole idea of requiring buyers to use the in-house mortgage company in order to receive the incentives is to prevent them from shopping. If they had shopped around, they would have found that they did not get such a good deal.”

With these assertions in mind, here are some tips for new home buyers who are considering using the builder’s in-house mortgage company:

Shop: You can’t make a sound decision if you don’t compare. Consequently, make sure the rate the builder offers is competitive.

Obtain good-faith estimates from not just the builder-lender, but at least two other sources — perhaps a broker who has his fingers on the market and deals with several funding lenders, and a bank or mortgage company that will fund the loan itself. Then compare them.

In many cases, the builder is acting in the same capacity as a broker, who gets paid by the borrower by charging an origination fee and sometimes by the funding lender as well in the form of a yield spread premium. So find out where the builder is charging you, not just on the front end but on the back end, too.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.

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