Should I work with the builder's preferred lender?

Asked by Mitchell Hall, New York, NY Thu May 17, 2007

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Rhonda Porter, , Seattle, WA
Fri May 18, 2007
Often times builders will try to control the transaction by demanding their lender, title and escrow companies are used for a purchase. The builder may even offer significant closing cost credits to a buyer if they use their lender. Before committing to the builder's lender, a buyer should get a good faith estimate and compare it to the buyer's prefered lender. Recently I found that the builder's lender had padded the rate enough to pay for a significant amount of the closing cost credit. To read more about this, click the link below:
3 votes
Lynn Roberts…, Agent, Seattle, WA
Fri Nov 2, 2007
This is a very good question, and I don't believe there is one answer that fits all scenarios. For instance, an existing condo will be fairly standard in requirements for a lenders approval, such as a percentage, usually 60-70%, of owner occupied units for a buyer to acquire financing.

New construction and condo conversions, however, have a few more requirements for approval. One lender I have been working with on a condo conversion I am doing now has agreed to finance buyers once we have two "pre-sold" units. This lender will approve the building in advance of the buyers coming in, and will then review each buyer individually and provide loans for that buyer to choose from based on their specific needs. If that same buyer went to a lender who hasn't preapproved the building in advance, that lender might not fund the loan for the buyer and unfortunately, this happens all too often.

While I agree that all good faith estimates, rates and fees should be checked by other professionals in that field, there is a reason for preferred lenders and if the buyer finds the rates and fees don't match what they are hoping to find, the condo/new construction home might not be the right one for them.

Having said this i do believe that new construction single family residences are much more liberal in terms of lender requirements, and the buyer has much more latitude when it comes to making their lender selection.
2 votes
Ben Kakimoto, Agent, Seattle, WA
Thu May 17, 2007
Speaking from a condo perspective, many new developments now require buyers to be pre-approved by the preferred lender, though they may use any lender of their choice. And, due to new condo financing requirements, not all lenders may be able to fund, so the preferred lender may be the best option. From what I've seen, preferred lenders are competitive and developers offer buyer incentives up to $10,000 for using their preferred lender. It's best to compare GFE's from several lenders. James provided great caveat below, the preferred lender may not be as responsive to buyers concerns or needs as an independent lender.
1 vote
James Hsu, Agent, Bothell, WA
Thu May 17, 2007
Not without first shopping the rates and loan programs being offered by the preferred lender. Quite often, at least in this area, there are buyer incentives tied to using the builder's preferred lender such as a rebate. The lender really may be cutting their fees down (and rebating the buyer), expecting to make it up on volume. Other times however, the lender may be padding their fees or not offering the best interest rate to make up the money they're giving up in incentives.

I recommend to all my new construction buyers to shop the preferred lender's rates and programs. Sometimes they do have a great deal, other times you can easily see where they're making up their rebate from.

From the builder's perspective, they would rather buyers work with their lender because of control and they know what to expect from their preferred lender. They can call the lender and check on status of a particular buyer and they can push the lender when needed.

A note for buyers working with a builder's preferred lender. Make sure the lender is still working and earning your business. I've dealt with some where they know they've got the deal already and then the buyers become distant priority. Calls and emails aren't returned in a timely manner anymore, info they give is wrong or incomplete, etc. etc. If that happens, tell the builder. Have your agent tell the builder as well. Just cause the lender thinks the deal is in the bag does not give them an excuse to slack off.
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1 vote
simplenickel, Both Buyer And Seller, San Francisco, CA
Thu May 17, 2007
Sure, why not. It is possible that the builder / developer struck a deal with their preferred lender providing better than average rates to potential buyers. One hand washing the other kinda deal. But be sure to get a competitive lender to take a look at the GFE (Good faith estimate). Cheers!
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1 vote
Patrick Beri…, Agent, Seattle, WA
Wed Aug 20, 2008
This is a great question. I HATE it when a seller tries to require a buyer to use (or just get prequalified with) a certain lender. Similarly, I dislike when a buyer is required to use the seller's escrow. Sometimes it's ok--IF this relationship results in a cost savings for the buyer. But if it's just a matter of the seller just wanting to use a certain lender or mortgage company I try to avoid it at all costs.

I just sold a DR Horton house and we ended up using the seller's preferred lender because we were able to get some other considerations in exchange. I guess the best way to answer this question is to go back to basics. What do you have to do to get the best deal for the client? Will using this lender benefit the client more than not using the lender?

I've seen a few purchase and sale agreements in which the listing agent takes it upon him/herself to require the buyer to get prequalified with a lender affiliated with the listing agent's brokerage (Some John L Scntt agents do this, I believe). Usually I just ignore that because I can find a better lender for my client, but like I said above, if it works out to my client's advantage then I'm all for it.
0 votes
Carol Pease,…, Agent, Austin, TX
Fri Aug 1, 2008
The builder's preferred lender may be able to cut you a deal on financing. Why? Very often the builder buys down points to make the financing more attractive to buyers. Try to get your best price negotiated first. Most builders will not negotiate much off of list price but will toss in upgrades to get the deal together.

Carol Pease
0 votes
Bob McClure, Other Pro, Walled Lake, MI
Sun Jul 27, 2008
no.....and don't use his title co...either...pick your own lender and title u did..they are usually worded well within the limits of state law, but read every word of it........bob mcclure- mortgage now- farmington, michiagn...(248) 974-4444.i have almost 14 years of experience..and am licensed in your state........
0 votes
Kevin Tinsley, , Tacoma, WA
Mon Jul 21, 2008
Another item to consider is the amount of earnest money deposit you need if you use an outside lender and/or adding upgrades. Most builders will increase the earnest money deposit if you choose an outside lender. Example: 1,500 earnest money deposit with preferred lender, vs 5,000 if you use your lender. Always, always, always, compare rates the day you lock in. TIP: Call another branch of the same in-house lender to see if the fees they quoted you are the same as being offered by the builders loan officer. Best Wishes!
0 votes
Perry Hender…, Agent, Austin, TX
Wed Jul 16, 2008
The only time I suggest a "must work" with the the preferred vendor is when my clients are working with a condo project that is less than 51% occupied or otherwise "hard to finance". The preferred lender may already have the project certified, a process that at a minimum will delay the funding at least a week (probably 3 for average lenders). Having a project certified in this market is grueling so I always suggest not to risk the deal.

Otherwise, its the buyer choice.
0 votes
Daniel, , Baton Rouge, LA
Tue Jul 15, 2008
get the best mortgage for you, not the builder
0 votes
John Tyler, , Las Vegas, NV
Tue Jul 15, 2008
Having the builder and the lender in a business relationship, especially when the builder and the lender are the same company is a conflict of interest that does not serve the consumer. If you compare rates “at closing” at the time the rate and term are locked (before that they will say anything the buyer wants to hear) the builder’s lender will generally be higher than the market. If the incentive is used to “buy the loan down” if you took that same incentive to a lender you know like and trust you would get better rate and terms 99 times out of 100.

These incentives are collusion, coercion, smoke and mirrors. I cannot believe it is legal for the incentive to be tied to a lender and that the customer cannot use whomever they wish for financing and still receive the incentive offered.

The only reason there is this requirement is because it places greater control over the customer to get them to do what the builder wants. By keeping all of the business in the same family it increases profits. It has artificially increased the value of homes because these “incentives” are used to pay costs. The higher interest rates for the customer makes for a higher yield loan in the secondary market further increasing the builder’s profits.

This is not consumer friendly. It does not build relationships. It further supports the consumer image that Realtors and Lenders are little more than used car salespeople. If it isn’t illegal it ought to be.

0 votes
Joel Scott, Agent, Kirkland, WA
Wed Apr 2, 2008
Only if its the best rate and terms, and going elswhere doesn't harm your purchase position regarding price, terms, add - ons, etc.

Check around, there are many options out there.
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0 votes
Barbara Mcma…, , Seattle, WA
Fri Nov 16, 2007
The answer is Maybe! You should evaluate several loan programs with recommended banks and brokers before "signing up" Also, your lender may be able to match the builder's program if you ask. Be sure to get a good faith estimate and have your Realtor or accountant help you read through it before you sign anything!
0 votes
Sara, , Alvin, TX
Sat Nov 3, 2007
You should definately do some research here. Ask other lenders what their rates are before signing on with the builder's lender. When my husband and I were trying to buy a home, we almost made a very big mistake by going with a preferred lender. We would have gotten a loan at 6.5%. When we went with our own lender, we got a loan for 5.3%. I'm not saying that all preferred lenders are like this. It's a case by case basis.
0 votes
Perry Hender…, Agent, Austin, TX
Fri Nov 2, 2007
Maybe, if you get incentives or good service, why not?
0 votes
Suzanne Walk…, Agent, Oklahoma City, OK
Fri Nov 2, 2007
First question I always ask is who owns the 'preferred' lender, or in other words, is there an affiliated business arrangement? I think you'll find most scenarios below will follow suit.

Lastly, I would question appraisal, or is one even being required?

I understand that a lot of builders will have all the best motives and actions, however, I TRULY believe all buyers need representation from a highly qualified real estate agent, that could, answer this question depending on the arrangments.

Thanks for making Trulia such an awesome sight. It is good to see legitimate real estate conversation going on from such honorable people in our diverse profession with very diverse points of view.
Awesome question and great answers.
0 votes
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