iNest Newsletter

Financing your home: Important points before you make the purchase

When you buy a resale house, the seller expects you to find and arrange all the financing yourself. When you buy a brand new house from a production builder, the seller/builder will invariably offer financing, either through his own mortgage company or through a designated lender. The rates and terms are usually competitive; the icing on the cake is the sizable monetary incentives--usually several thousand dollars--the builder will contribute if you use his preferred lender.

The largest national home building firms including Pulte, Ryland, US Home, Kaufman and Broad, and Centex own subsidiaries that are full service mortgage lenders with their own funds. Smaller, regional companies may have a subsidiary that is a mortgage broker--a "mortgage matchmaker" that matches up buyers seeking mortgages with investors. The smallest home-building firms may also have their own mortgage broker, but they are more likely to have a relationship with an outside lender. Whatever the arrangement, the builders’ lenders offer buyers the same enormous variety of loan programs that traditional mortgage lenders such as savings and loans or banks offer.

Though a builder-owned mortgage company sounds as if "the builders have their hands in both pockets," as one said, large and small builders and builder-lenders around the country all said the main reason for having their own mortgage company or a preferred lender was "to control the deal," not to add another profit center.

In explaining why his firm set up its own mortgage company, Tom Bozzuto, president of Bozzuto Homes, a medium sized homebuilder in the Washington, DC market said, "we didn’t do it to make money but to keep control of the process. Our customers went through the mortgage process with no difficulty, and then they got to the closing table and needed more money [to close and take possession of the house]. Or two days before closing it turned out that their credit was not okay, or they had a relative ‘who does mortgage I want her to do mine’ and it delayed things."

Columbia, Maryland builder Allan Washak further elaborated, "the product I build, I own until you settle and move in. I’m trying to protect my financial interest in that house. I also want to protect our customers--their interest is just as important. I want to make sure that our buyers have a sound mortgage from a reputable lender. My concern is the buyer who looks up on the internet, gets baited and switched and taken advantage of by a lender that promises teaser low rates but adds on thousands of dollars in closing fees and prepays."

And then there’s the "no shows,"--the lenders who don’t show up at the closing. One builder who now has his own mortgage company said, "I’ve had unsuspecting buyers sign up with flaky lenders who offered great rates but didn’t show up for closing. We had to deal with a moving van on the street full of furniture, crying children, distraught parents and we had to scramble to find alternative financing."

Another reason that builders cited for having a single, designated lender was logistics and overhead. A medium to large sized builder may close on 50 houses a month, and all of them will be in the last few days of that month. If the builder has to deal with 50 different lenders and make sure that all the loan documents are in order, it can be a logistical nightmare that requires several employees full time to coordinate. Even the small builder who only builds 30 houses a year prefers to deal with only one lender instead of 30.

While builders clearly benefit from having their own mortgage company, so do buyers because the priority of the builder’s mortgage company is to sell houses and secondarily to sell loans. As Bozzuto said, "we are principally in the home building business. It is not unusual for our mortgage company to say we will take a little less money on this buyer to make sure that the sale did happen."

And not just one house. "We want to sell their first house, their last active adult community house and their two houses in between," said Deborah Still, executive vice president and chief operating office for Pulte Mortgage.

Besides offering favorable rates in an industry that is "ferociously competitive," the builders’ lenders often have lower closing costs than conventional lenders. For example, many builder lenders do not charge a loan application fee, which can often be several hundred dollars, and only charge their cost--about $20--to obtain credit reports from the three major credit reporting bureaus, Equifax, TransUnion and Experian (many lenders charge $50 to $75 for this).

Of course you should shop the competition before you sign on with the builder’s lender, but "typically if you compare the ‘all-in price’ among lenders, you’re better off to go with the building company lender. If you do the math and compare the total costs of the loan including closing costs to other lenders, you will come out ahead, especially with the builder’s incentives," said David Brown, senior vice president of Ryland Mortgage, and a mortgage lender for 18 years.

In addition of favorable rates and lower closing costs, some builder lenders have programs and coaches to help first time buyers save up enough money for a down payment, often the biggest hurdle to home ownership for this group. CTX, the mortgage company for Centex Homes, and Pulte Mortgage also has councilors who work with buyers who need to clean up their credit in order to get a loan approval.

Another plus with builders’ lenders: they’re very attuned to two situations that frequently occur in the financing of new houses--delays in construction that affect the closing and the timing of a lock-in on mortgage rates and buyers’ desire to add $10,000 to $50,000 worth of options after the initial loan amount has been approved.

A builder’s mortgage lender will be in frequent communication with the builder’s sales agent, often learning of delays before the buyer does and adjusting the closing date accordingly. If you use a different lender, you will have to monitor this yourself and make sure that the lender is kept informed. Otherwise the lender may lock you prematurely into a mortgage rate that may expire before the house is finished.

Even a builder’s lender is not infallible, however, and he can lock in the mortgage rate too soon. "But, as a builder mortgage company borrower, you’re more insulated from delays that mess up locks. You have a lock that expires in a week; it’s usually the fault of the home building division if there’s a delay. We would extend your lock but a third party has no vested interest, if the market moves and rates go up, the buyer is exposed, " Brown said.

As the house goes up and buyers can finally see what it looks like, many decide to add things. Rather than seek approval for a bigger loan, many builders’ lenders will get approval for a higher mortgage initially. "They ask for $300,000, we get $310,000 or $320,000," Still said. The loan adjustment is easily managed because the builder’s sales agent simply calls his lender. If you use another lender, you must inform him that you want to borrow more money and then check up to make sure that you are qualified to do this and that your lender has adjusted the mortgage and the good faith estimate of closing costs accordingly.

Besides the strong likelihood of coming out ahead financially, buyers also benefit from the quality of service that the builder’s mortgage lenders have a strong incentive to provide. Since a homebuilder can supply many customers to a lender, it’s in the lender’s interest to have everything go smoothly. As Donna Veronick, vice president and area manager for US Home Mortgage described the situation, "we have two customers to keep happy. We must please both the buyers and the builders, and the builder is not happy if the buyers are not happy."

Katherine Salant can be reached at
salantques@aol.com

Copyright 2000 Katherine Salant
Distributed by Inman News Features