Are builder incentives a good deal — or are there hidden costs?

By ,
Ask a Lender
January 4, 2018


Key Points

Are builder incentives worth it?

  • Builder incentives steer homebuyers toward a builder’s preferred lender.
  • Builders may offer to pay closing costs.
  • Builder financing may involve higher interest rates or fees.
  • If you need to close quickly, builder financing may be the best option.

If you’re house shopping, you may have fallen in love with a newly-constructed home. If you’ll be buying the new home directly from the builder, you may have learned about builder incentives — special offers the homebuilder makes available if you use its in-house financing or preferred lender to buy the house.

Builder incentives seem like a great deal for the homebuyer. But are they?

Builder incentives can be a boon to homebuyers, but they also can sound better than they actually are. Before committing to builder financing, you owe it to yourself to fully understand what you’re getting into, and to compare the builder’s interest rate and terms with other lenders who may be able to offer a better deal.

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What are builder incentives?

If you’re buying a home directly from a builder, the builder may offer incentives if you use their preferred lender. The builder may offer in-house financing, or partner with an outside lender.

Often, builder incentives take the form of builder credits. These are credits homebuyers can put toward the cost of financing a home, such as closing costs.

Often, builders offer incentives for using their preferred lender, but take those incentives off the table if the homebuyer decides to finance the purchase through a different lender. It’s legal for a builder to take away those incentives if the homebuyer goes with a different lender, but it is illegal for a builder to charge you more for the house because you used a different lender. That would violate the Real Estate Settlement and Procedures Act (RESPA).

Although not limited to homes sold directly by builders, homebuyers also may want to know about seller concessions (also sometimes called seller contributions), which are concessions made by the seller to sweeten the deal for homebuyers. The seller could help pay for the buyer’s closing costs, for example, or agree to make needed repairs as a condition of the sale. Sellers are most likely to offer concessions in a “buyer’s market” — that is, in a market where the supply of homes exceeds the demand for them.

Are builder incentives a good deal?

On the surface, the obvious advantage of builder incentives is that they can save homebuyers some money. But homebuyers should be careful to evaluate the cost of financing through the builder, even with builder incentives, compared to the cost of financing through other lenders.

Other lenders may offer lower interest rates, for example, or charge fewer or lower fees, easily making them a better deal than the builder’s financing, even with builder credits. On the other hand, builder financing has other advantages than the cost of financing.

If you need to close the deal quickly, for example, builder financing may be the way to go, because the builder’s lender already has much of the information about the house and can generally close the loan on a faster timeline.

Ultimately, it’s the homebuyer’s responsibility to carefully compare the options on the table and decide what will work best for them. So, it makes sense to do your due diligence and compare lenders and not take the first offer on the table.

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