A preferred lender might be the best – but not always

When you buy a newly built home or have one built from scratch, you have different financing options.

You can get a mortgage loan from a lender of your choice. Or, you can go with the builder’s preferred lender if they have internal financing or if they partner with a bank.

You never have to use your builder’s preferred lender. And, as always, you should be looking for the lowest interest rate on your home loan so you know you’re getting the best deal.

Start shopping for mortgage rates (October 1, 2021)

In this article (Skip to …)

About Builders’ Preferred Lenders

Home and residential construction companies sometimes offer in-house mortgage financing to their buyers. Alternatively, they can partner with a mortgage company or a bank that offers home loans for new construction.

It can be a mutually beneficial partnership that benefits both the builder and the lender, and perhaps the buyer as well.

“Many home builders have set up a preferred lender who they believe will work in the best interests of the buyer by providing a better financing option and increased convenience,” says real estate agent Jason Gelios.

“The buyer is referred to this preferred lender through the builder, who in turn tries to get the buyer’s pre-approval,” he explains.

So there might be some advantages to using your home builder’s preferred lender in terms of speed and convenience.

But, as with any mortgage, the loan must benefit you.

Before choosing the lender recommended by your builder, it’s a good idea to compare the rates and closing costs of a few other companies to make sure you get the best possible deal on your new home.

Start shopping for mortgage rates (October 1, 2021)

How Preferred Lenders Work

A builder’s preferred lender will have a working relationship with the construction company. They should be able to streamline the home buying process by approving construction plans and offering the borrower a lock-in rate that will last until construction is complete.

To give an example, Gregg Cantor, president and CEO of Murray Lampert Design Build Remodel, says his company’s preferred lender is US Bank.

“We have carried out many projects thanks to the loan programs of the American Bank, and we make it easy for the owner / borrower. The borrower provides the loan documentation and we take care of the entire builder, including the architecture, scope of work, interior design and construction, ”notes Cantor.

“We have found that the owner-lender-entrepreneur model works well. It’s very effective, and if it’s done right, everyone is protected.

Can my builder require me to use their preferred lender?

Rest assured that you don’t have to choose internal financing or your builder’s affiliate lender.

“Builders cannot require a buyer to use their preferred or affiliate lenders. Buyers are not legally tied to any lender before signing, and a builder can’t charge them a higher price for choosing another lender, ”said Robert Heck, Mortgage Manager at Morty.

Forcing a buyer to use a specific lender to enter into a mortgage in addition to the pre-approval of a mortgage would be a violation of RESPA laws.

If you do not wish to use your builder’s preferred lender, “You can refuse to sign any construction or loan documents and request that the requirements be removed from your agreement” -Jason Gelios, Realtor

“It also defeats the purpose of many other fair loan regulations that have been created to help make a process more transparent and fair for all homebuyers,” Heck said.

If your builder is trying to convince you to use their preferred lender, know your rights.

“You can refuse to sign any construction or loan document and request that the requirements be removed from your agreement. If you notice that the builder has included in your purchase contract a requirement to use their preferred lender, you can seek legal advice to remedy the situation or withdraw from the deal, ”suggests Gelios.

But even if they can’t force you, don’t be surprised if your builder tries to point you to their preferred lender by offering incentives and sweeteners.

Benefits of using your builder’s preferred lender

Choosing a builder’s preferred lender can sometimes be cheaper and make the lending process easier.

“Choosing a preferred lender can come with incentives for the buyer, including improvements to the buyer’s home, loans to the seller for closing costs, and so on. Heck explains.

“Plus, when you go this route, your loan schedule won’t be something the builder or lender blames you. Often, in-house lenders offer very long-term rate lock-in periods as additional incentives that match your construction schedule; this flexibility is generally not offered, as most traditional lenders limit blocking periods from 90 to 180 days.

Choosing your builder’s partner lender can also save you time.

“In our case, we know what the bank needs to successfully finance a loan for a new construction or an entire home renovation, providing a very streamlined process for the consumer,” Cantor adds.

Real estate agent Samantha Odo also emphasizes that it is in everyone’s best interests for the deal to be made when choosing a builder’s preferred lender.

“Their preferred lender is someone who is likely to get the borrower’s approval for the builder’s project wrong more often than a random lender,” says Odo.

“When a lender has a good relationship with a builder, it’s usually because they work well together, have a good process, and enjoy higher approval rates.

Cons of Using Your Builder’s Preferred Lender

On the other hand, using a partner lender can have its drawbacks.

“The disadvantages lie in the affiliation between the lender and the builder. When the company providing the financing is the same one that builds and sells the house, there is a potential conflict of interest, ”Heck warns.

“While that doesn’t necessarily mean that a buyer will receive a worse offer or interest rate, it is a reason for caution,” he says.

Consider that the preferred lender may work too hard to please the builder / seller, without necessarily representing the best interests of the buyer.

“Not all preferred lenders will act this way, but when you have a lender who likes to receive referrals from a builder, their service can be skewed,” says Gelios.

One of the biggest risks of saying “yes” to your builder’s preferred lender is that you might not get the best loan deal. You could end up paying a higher interest rate with worse loan terms than if you had shopped around and compared offers from various lenders.

Fortunately, there is a simple solution.

You can get pre-approval from a few lenders and compare their offers to make sure you get the best rate.

The approval process will take a little longer for a new home than for an existing home. But since a lower mortgage rate can easily save you thousands of dollars, the extra effort is usually worth it.

Compare your loan options. Start here (October 1, 2021)

Why builders favored mortgage lenders

It’s no surprise that many contractors and construction companies choose to partner with an external lender or offer internal financing options. This increases the convenience factor for buyers, most of whom will eventually need a mortgage.

“It is very common for builders to have an affiliate lending partner just for financial purposes and to increase profits from the new construction and sale of the house. In some situations, builders may have a preferred lender just based on who they trust or who they’ve worked with before, ”Heck adds.

Beyond the financial incentives, “the manufacturer prefers to have control of the process. The builder’s lender could work harder to secure a loan to the buyer and notify the builder sooner if the buyer does not qualify. It’s easy to see why a builder would like this level of control, ”says lawyer and real estate agent Bruce Ailion.

Often, these advantages work in favor of the buyer as well as the builder. But if you find a better deal, you should definitely go with the company that saves you the most money.

Your builder can’t force you to use their preferred lender, so don’t let anyone make you think otherwise. And if the lender doesn’t offer competitive rates, it’s in your best interest to seek financing elsewhere.

The bottom line: should you use your builder’s preferred lender?

The truth is, your builder’s preferred or in-house lender can provide you with the best loan deal that saves you the most money and time.

They may offer incentives, a longer rate freeze, and / or a lower interest rate than their competitors. But you’ll only know for sure if you do your due diligence as a borrower.

“Shopping around and comparing lenders will help you determine if a preferred lender’s offer is the best option in the long run or if you would be better served with a lender of your choice,” recommends Heck.

Check your new rate (October 1, 2021)