A preferred lender may be the best – but not always
When buying a new home or building it from scratch, you have different financing options.
You can get a home equity loan from a lender of your choice. Or, you can choose the manufacturer’s preferred lender, if he has internal financing or works with a bank.
You are never required to use your manufacturer’s preferred lender. And, as always, you should shop for the lowest interest rate on your mortgage so you know you are getting the best deal.
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About the lenders that builders prefer
Housing and construction companies sometimes offer in-house mortgage financing to their buyers. Alternatively, they can work with a mortgage company or bank that offers mortgages for new construction.
This can be a mutually beneficial partnership that works to the benefit of both the manufacturer and the lender – and possibly the buyer.
“Many home builders have a preferred lender who claim it will work in the best interest of the home buyer by providing a better financing option and added convenience,” explains Realtor. Jason Gelios.
“The buyer is referred to this preferred lender through the manufacturer, who in turn works to help the buyer get pre-approved,” he explains.
Therefore, there may be advantages in using your home builder’s preferred lender in terms of speed and convenience.
But as with any mortgage, the loan has to be repaid you.
Before choosing to use the lender suggested by your builder, it is a good idea to compare prices and closing costs from some other companies to make sure you are getting the best deal for your new home.
How Preferred Lenders Work
A manufacturer’s preferred lender will have an employment relationship with the construction company. They should be able to streamline the home buying process by approving construction plans and offering the borrower an interest rate lock that will last until construction is complete.
To give an example, Greg CantorMurray Lampert Design Build Build Remodel chairman and CEO says his company’s preferred lender is US Bank.
“We have completed many projects through Bank of America loan programs and are facilitating the homeowner / borrower. “The borrower provides the loan documentation and we handle the manufacturer’s package, including the architecture, scope, interior design and construction,” notes Cantor.
“We found that the homeowner-lender-contractor model works well. “It’s very effective and if done right, everyone is protected.”
Can my builder ask me to use his preferred lender?
Rest assured that you do not need to choose your manufacturer’s internal financing or affiliate lender.
“Builders can not require the buyer to use the lenders they prefer or their partners. “Buyers are not legally bound by any lender before signing, and a manufacturer can not charge them a higher price to go with a different lender,” he explains. Robert HeckHead of Mortgages for Morty.
Forcing a buyer to use a particular lender to close a mortgage in addition to pre-approving a mortgage would be a breach of RESPA laws.
If you do not want to use your manufacturer’s preferred lender, “You can refuse to sign any construction or loan documents and request that the claims be deducted from your agreement” —Jason Gelios, Realtor
“It also runs counter to the goal of many other fair loan regulations designed to help make the process more transparent and equitable for all home buyers,” says Heck.
If your builder tries to arm you hard to use his preferred lender, you know your rights.
“You can refuse to sign any construction or loan document and ask for the requirements to be removed from your agreement. “If you notice that the manufacturer has included a requirement in your purchase agreement for the use of their preferred lender, you can seek legal advice to rectify the situation or withdraw from the agreement,” suggests Gelios.
But even if they can not force you, do not be surprised if your manufacturer tries to direct you to his preferred lender, offering incentives and sweeteners.
Benefits of using your manufacturer’s preferred lender
Choosing the lender that a manufacturer prefers can sometimes be cheaper and lead to an easier lending process.
“Choosing a preferred lender can be accompanied by incentives for the buyer, such as upgrades to the buyer’s home, seller credit to closing costs, and more,” says Heck.
“Also, when you choose this path, your lending schedule will not be something that the manufacturer or lender is going to hold against you. In-house lenders often offer very long interest rate lockout periods as additional incentives to align with your construction schedule. “This flexibility is not usually offered, as most traditional lenders maximize lock-in periods of between 90 and 180 days.”
Choosing your partner’s partner lender can also save 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 much improved process for the consumer,” adds Cantor.
estate agent Samantha Odo also points out that it is in everyone’s interest to complete the agreement when choosing a manufacturer’s preferred lender.
“Their preferred lender is someone who is likely to make the mistake of borrowing approval for the builder’s work more often than a randomly selected lender,” says Odo.
“When a lender has a good relationship with a manufacturer, it is usually because they work well together, have a good process and enjoy higher approval rates.”
Disadvantages of using your manufacturer’s preferred lender
On the other hand, using a partner lender can have its drawbacks.
“The disadvantages lie in the relationship between the lender and the manufacturer. “When the financing company is the one that builds and sells the house, there is a potential conflict of interest.”
“While this does not necessarily mean that a buyer will receive a worse offer or interest rate, it is a cause for concern,” he says.
Consider that the preferred lender can work very hard to please the manufacturer / seller, without necessarily representing the buyer’s best interests.
“Not every preferred lender will act this way, but when you have a lender who likes to receive referrals from a manufacturer, their service can be skewed,” says Gelios.
One of the biggest risks in saying “yes” to your manufacturer’s preferred lender is that you may not get the best loan deal. You could end up paying a higher interest rate on worse loan terms than if you were shopping and comparing offers from different lenders.
Fortunately, there is an easy solution.
You can get pre-approval from some lenders and compare their offers to make sure you get the best price.
The approval process will take a little longer for a new home construction than an existing home. But given that a lower mortgage rate can easily save you thousands, the extra effort is usually worth it.
Why Builders Prefer Mortgage Lenders
Unsurprisingly, many contractors and construction companies choose to join forces with an outside lender or offer in-house financing options. This increases the convenience factor for buyers, most of whom will end up needing a home loan.
“It is more common for builders to have a lender partner purely for financial purposes and to increase profits from new construction and home sales. “In some cases, manufacturers may have a preferred lender simply based on who they trust or have a history of working together.”
In addition to financial incentives, “the manufacturer prefers to be in control of the process. The manufacturer’s lender can work harder to get a loan from a buyer and notify the builder in advance if the buyer does not qualify. “It’s easy to understand why a builder would want this level of control,” says the lawyer and real estate agent. Bruce Allion.
Often, these benefits work for both the buyer and the manufacturer. But if you find a better deal, you should definitely go for the one that saves you the most money.
Your builder may not ask you to use their preferred lender – so do not let anyone make you think otherwise. And if the lender does not offer competitive interest rates, it is in your best interest to look elsewhere for financing.
The bottom line: Should you use your manufacturer’s preferred lender?
The truth is that your manufacturer’s preferred or internal lender can provide the best loan deal that saves you the most money and time.
They can offer incentives, higher interest rate lock and / or lower interest rates than competitors. But you will not know this for sure unless you do your due diligence as a borrower.
“Buying and comparing lenders will help you determine if an offer from a preferred lender is the best long-term option or if you would be better off going with a lender of your choice,” Heck recommends.
The information contained on The Mortgage Reports is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its executives, parent or affiliates.