Should I Use My Homebuilder’s Preferred Lender?
It sounds like an enticing arrangement at first glance — “$5,000 toward closing costs!” “Appliance package included!” “$2,000 design allowance for upgrades!” — but does the buyer really win if they commit to the homebuilder’s lender to purchase their newly constructed home?
Using a preferred lender comes with the promise of certain named benefits, but it’s important to also consider the drawbacks. Below, we discuss the purpose of preferred lending as well as its advantages and disadvantages. We also provide general tips to follow before you choose a mortgage lender.
What exactly is a preferred lender?
A preferred lender is pretty much what you probably think it is — some entity’s preference for a buyer to go through a particular mortgage company for financing. Homebuilders and sellers can have preferred lenders, as well as real estate agents.
Buyers who work with a homebuilder’s or seller’s preferred lender are typically offered perks, such as closing cost credits and upgrade allowances.
Homebuilders have preferred lender relationships in place “to capture more of the value chain that goes into building, selling and financing a home,” said Barry Zigas, the director of housing policy for Consumer Federation of America in Washington, D.C. “The fees are attractive and the ability to arrange financing directly as the seller can help accelerate sales and make the process smoother.”
Keep in mind that as a buyer, you’re not required to commit to a preferred lender. You have the option to choose to whichever lender you’re eligible to borrow from to finance your home purchase.
Preferred lender pros and cons
Going with a preferred lender could mean a faster timeline from when you sign a contract to when you get to the closing table. It could also mean saving money on your desired interior upgrades, like granite countertops or hardwood flooring, and your total cash to close.
However, those builder perks might have some strings attached. Perhaps the preferred lender’s mortgage interest rate is higher than average or the origination fees cost more.
Look at the long term when you’re considering the advantages and disadvantages of working with a preferred lender, said Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Mich.
“Most (owners of new homes) plan on being there a while. So, what is the long-term cost going to be, and is that cost worth it?” Leyrer asked.
How to choose the right mortgage lender
Don’t be so quick to go with the first lender that offers you what sounds like a good deal with attractive incentives; shop around. No two lenders offer the same mortgage financing.
The typical homebuyer could see a lifetime savings of nearly $30,000 on a $300,000 loan by shopping around for the best mortgage interest rate, according to LendingTree’s latest Mortgage Rate Competition Index. That savings amount represents receiving a mortgage annual percentage rate that is 0.64 percentage points lower than the competition.
Still, go beyond rate shopping and picking the lender with the lowest one. Gather Loan Estimates from multiple lenders and compare the origination fees, discount points, cash to close, monthly payments, mortgage insurance and the other services and fees you can shop for. If it’s helpful to compare apples to apples on a single page, consider using the Federal Trade Commission’s mortgage shopping worksheet.
Leyrer recommended researching each lender you’re interested in by looking at their overall reputation and how long it takes them to get things done during the homebuying process. “Do your homework,” she said. “The internet’s a fabulous place to get information from and look at reviews or complaints.”
Don’t forget to solicit recommendations from family members and friends as well.
“It doesn’t hurt to ask around what they know about the company that you might be going with, as well as doing the Google search because there’s nothing better than a personal referral to make you feel comfortable and confident,” added Leyrer.
The bottom line
Using a preferred lender for your new home purchase could be helpful in the way of receiving attractive incentives and streamlining the homebuying process, but don’t say yes until you’ve done your due diligence to check out the competition.
Be sure you fully understand the relationship between your homebuilder and their preferred lender. What’s their affiliation? What does the builder get out of the relationship? Is there a potential conflict of interest?
“I think caution on the consumer side should be exercised,” Leyrer said, “to make sure that the entire picture can be seen, and to always get a second or third comparison of costs … so that you understand what you’re really getting and if it really is a benefit.”