Should You Use the Builder's Preferred Lender When Buying New Construction?

Should You Use the Builder's Preferred Lender When Buying New Construction?

You're sitting in the model-home sales office and the builder presents an offer that sounds pretty good:

Use our preferred lender and we'll give you thousands of dollars toward closing costs.

Or maybe it's:

Use our lender and receive a special interest rate.

Should you take the deal?

Maybe.

Builder lender incentives can provide real value, but I don't recommend choosing a mortgage based solely on the incentive printed on the flyer.

We need to look at the entire loan.

What Is a Builder's Preferred Lender?

Many home builders have relationships with particular mortgage companies.

Some large builders may even have affiliated mortgage operations.

The builder may offer certain financial incentives when buyers obtain financing through the preferred lender, subject to the terms of the offer and applicable requirements.

Those incentives may include:

• Closing-cost assistance

• Interest-rate incentives

• Temporary rate buydowns

• Discount points

• Other promotional financing offers

Depending on the transaction, these can be worth considering.

Why Do Builders Offer Lender Incentives?

Builders want transactions to close.

Working with lenders familiar with the builder, community and construction process can help coordinate financing with the expected closing schedule.

There can also be affiliated-business relationships that should be disclosed when applicable.

An incentive doesn't automatically mean something is wrong with the financing.

It simply means you should compare it carefully.

Don't Look Only at the Interest Rate

This is probably the most important lesson.

A lender advertises a low rate.

Great.

Now ask:

What does it cost to get that rate?

A low advertised interest rate may involve:

• Discount points

• Specific loan programs

• Particular property requirements

• Closing deadlines

• Larger down payments

• Preferred-lender requirements

Ask for the complete numbers.

Look at the APR

The interest rate and APR aren't the same thing.

APR can help borrowers evaluate certain costs associated with the loan, although it isn't the only number you should compare.

When reviewing loan options, consider:

• Interest rate

• APR

• Discount points

• Lender fees

• Monthly payment

• Cash needed at closing

• Mortgage insurance when applicable

Compare Loan Estimates

Don't compare financing using a text message or verbal quote.

When appropriate in the lending process, compare official Loan Estimates from lenders for similar scenarios.

Try to make the comparison as close to apples-to-apples as possible.

That means comparing:

• Same loan type

• Same down payment

• Same approximate loan amount

• Same lock considerations

• Similar timing

Then look at the actual costs.

Example: The Big Closing-Cost Credit

Suppose the builder's lender offers:

$15,000 toward eligible closing costs.

That certainly gets your attention.

But let's say another lender offers different pricing or fees.

Which one is better?

We can't answer from the $15,000 incentive alone.

We need to calculate the complete transaction.

The builder's lender could still be the better choice.

Or the outside lender could potentially offer a stronger long-term financial option.

Run the numbers.

Is the Builder's Special Rate Temporary or Permanent?

This question is critical.

If the builder advertises a very low rate, ask whether it is:

• A temporary buydown

• A permanent rate obtained through discount points

• A promotional rate tied to specific inventory

• Available only under particular loan terms

A 2-1 temporary buydown is very different from a permanently lower note rate.

Don't assume they're the same.

Ask Which Homes Qualify

Builder advertisements often contain conditions.

A financing incentive might apply only to:

• Selected inventory homes

• Certain floor plans

• Homes closing by a specific date

• Particular communities

• Specific loan programs

The beautiful model you toured may not qualify for the advertised financing.

Ask before building your budget around the promotion.

Ask About the Closing Deadline

Builders may attach incentives to a required closing date.

That's particularly common with completed or nearly completed inventory.

Make sure your lender can realistically meet the required timeline.

Also understand what happens to the incentive if closing is delayed.

The contract and incentive terms matter.

Can You Use Your Own Lender?

Your ability to choose financing and the consequences of doing so depend on the transaction and contract.

A builder may make certain incentives conditional on using its preferred lender.

That doesn't necessarily mean you should reject the preferred lender.

It means you should understand the tradeoff before deciding.

What If Your Outside Lender Has a Better Rate?

Don't stop at the rate.

Ask both lenders for comparable scenarios.

Maybe one lender has a lower interest rate but higher fees.

Maybe another offers a closing-cost incentive but a different rate.

We want to know:

Which option makes the most sense for your actual financial goals?

Think About How Long You'll Keep the Loan

Suppose one option requires you to pay more upfront for a lower interest rate.

How long will it take the monthly savings to recover that cost?

That's your approximate break-even period.

If you expect to sell or refinance before reaching that point, the upfront cost deserves closer examination.

Don't Assume You'll Refinance

Buyers sometimes accept a financing structure because someone tells them:

"You can just refinance later."

Maybe you can.

But future interest rates, property values, credit, income and lending requirements are unknown.

Choose a mortgage you can manage based on today's information.

Treat a future refinance as a possibility, not a guarantee.

Builder Lender vs. Outside Lender

There isn't a universal winner.

The builder's lender may offer excellent financing and substantial incentives.

An outside lender may offer a better option for another buyer.

Your financial profile matters.

Your loan program matters.

Your expected time in the home matters.

That's why I don't automatically tell buyers to use or avoid the builder's lender.

I tell them to compare.

Don't Forget the House While Comparing the Loan

An amazing financing incentive shouldn't convince you to buy the wrong home.

Before deciding, ask:

• Is this the right floor plan?

• Is the location right?

• What is the property tax rate?

• What are the HOA costs?

• Is the builder's track record acceptable?

• Does the monthly payment fit my budget?

• Would I still want this house without the promotion?

That last question is especially useful.

Final Thoughts

Builder lender incentives can be valuable.

Take advantage of them when the numbers make sense.

But don't choose financing based solely on the biggest credit or lowest advertised rate.

Compare the complete loan.

Look at the rate, APR, fees, points, monthly payment, cash required at closing and long-term cost.

Then make the decision based on your financial goals.

About Marysol Calvillo

I'm a real estate broker serving buyers throughout Katy, Cypress, Hockley, 77084, 77095 and the greater Houston area.

I help new-construction buyers compare builders, communities, incentives, taxes and financing offers so they can evaluate the complete cost of purchasing a home.

Found a new-construction home with a big builder incentive? Before you sign, let's look at the complete offer. I'll help you evaluate the property and builder terms while your lending professionals provide the financing comparisons you need to make an informed decision.