We’ve previously covered topics regarding games builders play throughout the process of a constructing a new home. The referral fees, or kickbacks, they engage in with the “builder’s lender” is not okay. It costs you money and it’s illegal per the The Real Estate Settlement and Procedures Act (RESPA). This law, made more than 40 years ago, aimed to reduce mortgage servicing costs swollen by referral fees. RESPA has been a colossal failure. Settlement costs are as swollen today as ever and referral power of builders remains unchecked.
Since it’s not possible to embed the price of a mortgage into the price of a house, there’s no simple rule that can eliminate a builder’s referral power. Homebuyers just need to learn how to deal with it. Hopefully this article will be of help.
Builder influence on lender selection
Builders cannot require that a buyer use a specified lender. I REPEAT – builders cannot require that you use their lender. This is illegal. However, the builder can require that the buyer be qualified by his preferred lender. The builder can also offer incentives to use their preferred lender. A builder cannot post a sale price of $295,000 and raise the price to $300,000 if a buyer insists on using his own lender. However, a builder can post a price of $300,000 and reduce it to $295,000–or throw in $5,000 worth of extras–for borrowers who use the preferred lender. This is a widespread practice.
Why builders have preferred lenders
Not all builders are trying to push you to use their lender because they want more money, a referral fee, or a kick back. In fact, a member of our Stewardship family has extensive experience working with builders. Her primary reasoning is to be able to control the loan process. Her goal is to know what is going on and to have a higher level of confidence that the loan will close. When you’re developing a strategy for dealing with a builder who is pushing a preferred lender, it’s useful to know where the builder is coming from. He expects to be compensated by the lender for the referral of clients, often through a marketing arrangement where the lender pays some of the builder’s marketing expenses. In addition, the builder expects the preferred lender to provide assurance that home sales won’t fall through because of a lack of financing.
The builder wants to avoid wasting significant dollars on someone who leaves because their loan doesn’t come through. Under the arrangement between the builder and the lender, a loan to a buyer that can only close at a loss will nonetheless be made, since the profit margin on the house will more than cover the loss. For example, if the buyer turns out to have previously undisclosed credit problems that substantially reduce the price at which the loan can be sold, the in-house lender will make the loan and sell it at a loss.To make up for these losses, other buyers are overcharged.
Since builders cannot require buyers to use an in-house lender, they encourage them to do so by offering concessions they hope will value more than the overcharge.
A strategy for home shoppers
Don’t commit to a builder with an in-house lender without knowing their overcharge. The true price of the house when using the builder’s lender is Price + Overcharge – Concessions.
The extent of the overcharge on the loan should be measured in present value dollars by shopping one or more lenders on the same day. If the selected loan is a 15-year fixed-rate mortgage that the builder’s lender offers at five percent, add the sum of points and all other lender charges. The difference between this amount and the comparable figure on the same five percent loan offered by an online lender, is the amount of the overcharge.
The value of concessions to the buyer could be less, perhaps considerably, than the value suggested by the builder. If the builder’s concession is to absorb some or all of the settlement costs, the buyer should check the alleged cost savings against those shown by other lenders.
If you’d like a comparative quote on a home loan, schedule an appoint below! One of our wise home loan advisors would be honored to help.
*This is a post of content originally written here.