As you search for a mortgage for your new home, you may have learned that your homebuilder has a preferred lender. But are they the right source for your mortgage?
Never rush into getting a mortgage. Spend as much time on this aspect of buying your new construction home as you do selecting your builder and floorplan. Increased diligence from you may save you thousands of dollars over the term of your loan.
Know the type of loan you prefer and what to expect. You may choose loans for 15 or 30 years, fixed rate or adjustable rate loans, conventional or FHA or VA financing. Ask lenders you’re considering for a Good Faith Estimate (GFE). For more about mortgage loans, refer to our resource section on The Greater Charleston New Homes Guide.
You cannot be forced to use a specific lender when obtaining a mortgage. In fact, the law permits you to get a mortgage from any lender you choose. It is best to get mortgage estimates from several lenders.
When reviewing mortgages, evaluate them based on the full cost of the mortgage being offered to you. Some lenders may have higher origination costs or cause you to pay more points. Ask for plain language explanations related to all your loan expenses and closing costs.
Kickbacks are illegal
Your builder may offer to pay your closing costs or provide incentives to use their preferred lender. Many builders in the Charleston area pay closing costs when you use their preferred lender. The Greater Charleston New Homes Guide lists all incentives and closing cost payments on our website. However, no builder can require that you use their affiliated lender, nor can these incentives and costs be added back into your mortgage. Nor can one party compensate another party when they get business from a homebuyer.
Lew Sichelman writes, “under the Real Estate Settlement and Procedures Act, offering consumers incentives in order to encourage them to use the affiliate is permissible.”
The Consumer Financial Protection Bureau’s Real Estate Settlement Procedures Act (RESPA) Section 8 prohibits “kickbacks” to affiliated or settlement parties — those who are parties to the real estate closing. According to Realtor.com, “A settlement service includes any service provided in connection with a real estate settlement including, but not limited to, title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, home warranty companies, services rendered by a real estate professional, the origination of a federally related mortgage loan, and the handling of the processing and closing or settlement.”
RESPA states, “Any person who gives or accepts a fee, kickback, or thing of value (payments, commissions, gifts, tangible item or special privileges) for the referral of settlement business is in violation of Section 8(a) of RESPA. Any person who gives or accepts any portion, split, or percentage of a charge for real estate settlement services, other than for services actually performed, is in violation of Section 8(b) of RESPA.”
What is the relationship between the mortgage company and your homebuilder?
RESPA does allow affiliated business relationships and requires that lenders disclose their relationship to you. Affiliates should give you an Affiliated Business Arrangement Disclosure Statement. This separate paper which you must receive with your GFE or upon mortgage application tells you the “nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider.”
Advantages to using your builder's preferred lender
Preferred lenders often know a specific builder and the neighborhoods where he is building better. This is helpful in new developments where not many lenders may have made loans to date. The preferred lender may know comps in the neighborhood and may work more quickly to help you secure your financing.
Frequently the bank with preferred lender status is the lender to the builder in the neighborhood where you wish to buy your home. Their familiarity with the development can expedite your loan paperwork.
Many publicly traded homebuilders such as Pulte, CalAtlantic, DR Horton have a common parent with a mortgage lender. Using these companies helps the builder stay on time and target when it comes to closing your home in a timely fashion.
As with everything in life, carefully evaluating options before you make a decision is critical to success. Seek several GFE before determining which mortgage lender you should use and understand exactly how all fees and costs impact the long term expense of your mortgage.
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