New Home Construction: Should You Finance Through Your Builder

There are pros and cons of arranging mortgage financing for new home construction through your builder's affiliated lender.

Last time you bought a new car, the dealer probably offered to arrange financing. Even furniture and electronics stores offer instant approval if you sign up for their in-house credit cards. Home builders, not surprisingly, want in on the financing game, too. When you visit their sales offices, you'll likely be offered a home mortgage from the builder's "approved" or "preferred" lenders. Are these a good deal?

First, be aware that builders are not consumer advocates who go looking for the best mortgage deal for you. These lenders are "approved" and "preferred" because they have a business relationship with the builder-sometimes the two firms are even owned by the same corporation. If you choose a mortgage from one of these financing companies or "affiliated lenders," the builder or its parent corporation makes money twice: first by selling you a home, and again by selling you a mortgage.

That's not necessarily a bad thing. The important question, however, is whether you come out ahead. Here are the pros and cons of using your builder's lender:

Convenience. Getting your mortgage from an affiliated lender will likely take less time than seeking approval from independent lenders. Because the affiliated lender is intimately familiar with the builder, the two companies can share information and speed up the processing time.

Greater likelihood of approval. Since builders are eager for you to purchase their homes, they are more likely to partner with lenders who are equally eager to approve your mortgage application. After all, their own profits would be affected if their affiliated lenders turned down too many potential buyers.

Incentives. Some builders will substantially reduce the price of a home-$5,000 to $10,000 is not unheard of-if you use one of their preferred lenders. Non-financial incentives are becoming increasingly popular, too, with builders offering to throw in everything from big-screen TVs to backyard landscaping.

Flexible closing. If your home is not completed on time and you have to delay closing, a builder's lender may be more flexible and easier to work with than an independent lender.

Higher rates and closing costs. According to the National Association of Mortgage Brokers (NAMB), affiliated lenders tend to offer interest rates one-eighth to one-quarter percent higher than what consumers could get from an independent lender. In addition, even when the rates are comparable, mortgages offered by affiliated lenders may carry higher closing costs (including points) that result in your paying more over the long run.

Possible price manipulation. Although Federal rules require that any price discount offered by builders for using one of their affiliated lenders must provide genuine savings, you need to be careful that a discount incentive isn't made up through charges hidden elsewhere.

Fewer options. There is enormous variety in the types of mortgages available today. Not only can homebuyers choose between a fixed-rate or adjustable-rate loan and select their term and payment options, but they can also explore a number of non-traditional mortgages designed for people with specific needs. A builder's shortlist of partner lenders is unlikely to match the array of mortgages you'll find if you search for your loan independently.

Limited lenders. The NAMB reports that some new home builders strong-arm potential buyers into limiting their financing options to the builder's list of preferred lenders. While builders are free to offer incentives, they are required by federal law to allow homebuyers to obtain their mortgage on the open market. They may be able to insist you seek mortgage pre-approval from one of their affiliates as a type of credit check, but they cannot compel you to borrow money from these lenders.

Just as you make a careful search for the right house, it's worth taking the time to shop around for the best mortgage. Look at what the builder is offering, but compare it with quotes from at least three outside lenders. By considering all of your options, you'll be able to arrange financing that best suits your needs, not the builder's.

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