Know the basics about builder financing options
Builder financing for newly constructed homes
- Builder financing is a loan either offered in-house by the builder, or by the builder’s preferred lenders.
- Builder financing may be more streamlined because the lender already has access to key documents.
- The builder may help with closing costs or offer other perks if you use their financing.
- You are not required to use lender financing, so shop around for the best rates and terms.
If you’re buying a house from a builder, whether they constructed a new home to your specifications or you’re buying a home in a new housing development, you probably need financing to pay for it. Although you’re free to get a loan from any financial institution, the builder may have advertised builder financing as one option. But what exactly is builder financing — and should you take advantage of it?
What is builder financing?
Builder financing is pretty much what it sounds like — it’s financing to purchase a new home offered through the builder. It can refer either to in-house financing from the builder’s company, or to financing for a financial institution the builder has a relationship with. Lenders in the latter category are sometimes referred to as builders’ “preferred lenders.”
Like any form of financing, there are both advantages and disadvantages to builder financing.
Pros and cons of builder financing
Obtaining financing through the builder’s preferred lender may be quicker and easier than going through an outside lender, because the builder’s lender already has much of the necessary information ready to go, such as homeowners association regulations or other documents related to the property. Additionally, builders sometimes offer perks if you go with their financing, such as assistance with closing costs.
On the other hand, don’t assume that builder financing will yield the best deal. Check with your local bank or credit union, and compare offers. A lower interest rate may more than make up for perks like closing cost assistance. Also be on the lookout for fees. Check how much the origination fee is, and check for other costs, such as prepayment penalties.
Do I have to use builder financing?
A builder cannot force you to obtain financing through a preferred lender. That’s not to say, however, that they can’t try to steer you in that direction. For instance, a builder may offer incentives such as money to go toward closing costs that are only on the table if the borrower uses the builder’s preferred lender. However, under the Real Estate Settlement and Procedures Act (RESPA), the builder may not charge more for the house if the homebuyer decides to use a different lender.
Most builders are on the level, but there are some shady deals out there. Be on the lookout for scams when considering builder financing. Some builders may preapprove the homebuyer for a loan without underwriting it and collect a down payment. The builder then won’t or can’t underwrite the loan, but still keeps the down payment.
Another scheme common when home sales are slow is called a “builder bailout.” Builder buyout schemes can take many forms, but are typically a ploy to get quick cash so the builder can pay off expensive, short-term construction loans. Some variations of the schemes can leave unsuspecting homebuyers on the hook for mortgage fraud.
Before agreeing to builder financing, do some research on the builder and their partner financial institutions. Ask the builder for references, and contact the people on the list. Reputable builders shouldn’t shy away from providing a long list of references. Also check out online reviews, the local chamber of commerce and the Better Business Bureau to see if there are any cautionary tales.
Finally, ask builders for a list of communities and subdivisions where they’ve worked. Drive by those if you can. Check court records – searching for the name of the company and the owner – in those areas as well to see if the builder has ever been sued.
If you ever have any doubt about whether a mortgage contract leaves you open to potential fraud, your best course of action is to hire a real estate attorney.
Making the decision
Ultimately, the homebuyer gets to decide who to obtain lending from. Though builder financing can come with some attractive perks, buyers would be well served to compare rates and terms of several financing options before making a final decision. Buying a house is the largest purchase most people make, and homebuyers would be well served to remember that comparing lenders to find the most favorable interest rates and loan terms can save them thousands of dollars.