When you are planning to buy a house under construction, your builders may have some preferred lenders they would like you to borrow from. There are pluses and minuses to this relationship, so be sure to ask plenty of questions and shop around to make sure it really is the best deal for you.
What is a preferred lender?
A preferred lender is one that the builder works with on a regular basis. It's an in-house service, similar to the repair center at the dealership where you buy your car. Sometimes the incentives and convenience offered by your dealership make it a better deal to use them to maintain or fix your car. Sometimes, you can do better going out on your own. The same can be said of your builder's preferred lender offer.
Do you have to borrow from a preferred lender?
Sometimes builders create a false impression that you are required to take loans from their preferred lenders, which is not true. Builders can't force you to choose one lender over another; you are free to borrow from whatever lenders you wish.
What does the builder get?
When a builder insists that you borrow from his preferred lenders, always try to determine the nature of their relationship. Sometimes builders have a percentage share in the money lending process. However, most of the time a builder is just seeking assurance that the sale of home will not fall through due to lack of finances or unfamiliar practices. Having a preferred lender, who is committed to the builder's accounts, means builders can depend on buyers being preapproved in a timely manner. The lender can also help the builders vet potential buyers and advise them as to whether or not they are a good financial match for a particular home.
Often times, builders will offer incentives to use their preferred lender, such as cash to the buyer for home upgrades. In addition to incentives, buyers using preferred lenders also benefit from the established relationship between builder and lender. Such familiarity means faster turnaround times and more continuity between the parties involved. In most cases, the construction superintendent, the builder's salesperson and the lender hold regular status reports, so everyone is up to date on the building process.
Protect yourself by contacting several possible outside lenders to compare what kind of deal the preferred lender is offering. Then you can better assess if the cash incentive, the efficiency of the builder/lender relationship and the loan terms really equal the best deal out there for you. While comparing prices, you can always negotiate with the builders for the concession on the loan. Aggressive bargaining can pay off in the end.
If you use your own lender
Should you decide to use another lender, keep in mind that your responsibilities will include making sure builder and lender communicate regarding your loan status and paperwork, assuring that your loan has a buffer to absorb the increased costs of upgrades to your home and determining the best time to lock in your loan. With an outside lender, your builder is under no obligation to advise or work with you should your rate lock expire before the house is completed.
Whether you choose a builder's preferred lender or use your own, the best way to reduce anxiety and missteps is to make sure that all parties are communicating well throughout the process. You can never ask too many questions or make too many follow-up phone calls to ensure the process is functioning smoothly.