- The Washington Times - Friday, July 10, 2009

Many local and national builders are trying to make the process easier for potential homebuyers by developing a list of preferred mortgage lenders and title companies to allow buyers to walk into a community, find a home they like and arrange for financing almost immediately.

In many communities, buyers are offered incentives such as closing cost assistance or free options when they buy a home as long as they work with the builder’s preferred lender. In some cases, however, these options are available to all buyers regardless of where they obtain financing.

While snapping up a home and a loan in one place may have its advantages, financial experts and consumer advocates recommend that homebuyers always shop around and compare loans to make sure they understand their loan terms and are truly obtaining the best possible financing for their circumstances.

“While the builder-offered loan may seem best on the surface, people should avoid getting too excited by the incentives being offered and make sure they are looking at the long-term consequences of the loan,” says Robert Masciola, deputy director of the Center for Strategic Research at the AFL-CIO. “Consumers should always make loan comparisons first rather than just accepting the deal.”

Builders work with preferred or affiliated lenders and title companies because this relationship gives them more control over the financing process. Rather than relying on multiple lenders who may or may not complete the financial transaction in time for the settlement, a preferred lender will be in communication with the builder and the buyer to resolve any potential problems.

“The value of a preferred lender relationship is the convenience of one-stop shopping for a consumer,” said Debora Blume, a spokesperson for national lender Wells Fargo Home Mortgage. “The buyer gets to work with a mortgage lender that understands the builder’s procedures and is committed to providing the borrower with outstanding customer service. As a preferred lender, we assist the customer to work within the home builder’s process, and we are able to provide loan products, programs and services that help the buyer with financing.”

Brent Mendelson, a senior loan officer with Choice Finance in Rockville, says builder-offered mortgages sometimes make sense, not only because they are convenient for the buyer, but also because the builder may have some influence with the lender if there are issues that need resolution. However, he believes all potential borrowers should take the time to meet with another reputable lender or mortgage broker to compare loan offers.

“No matter what purchase price you are at, this is likely to be the biggest purchase you will make, so you should not just accept the builder’s loan because it is easy,” says Mr. Mendelson. “Everyone should meet with two or three lenders to compare loans, and they should be honest and tell the loan officers they are doing this because they will get more honest answers that way.”

Barbara Sheehan, assistant vice president for mortgage products for Navy Federal Credit Union in Vienna, says that buyers not only need to do comparison shopping, but they also need to make sure they understand the relationship between the builder and preferred or affiliated lenders.

“The builder and the lender may have a long-term relationship or the lender may have been involved with the financing of the construction of the new home development and as part of that relationship have been promised a certain number of mortgage clients,” Ms. Sheehan says. “Builders are also trying to streamline the financing process so they don’t have to deal with multiple lenders, which is perfectly valid.”

Ms. Sheehan says that the biggest advantage to consumers of working with the builder’s preferred lender is access to the builder’s concessions, such as closing cost assistance.

“But buyers need to make sure they are also buying a home which has been appropriately priced for the area and that the price has not been inflated to cover these concessions,” Ms. Sheehan warns.

Now that the local real estate market favors buyers, some buyers find that builders are more willing to negotiate the issue of working with their preferred lender and title company.

“Buyers shouldn’t be afraid to ask if they can work with another lender and still get the builder’s incentives,” says Ms. Sheehan. “If they find another lender offering a better deal on the loan, they should see if they can write the contract to allow them to work with that lender and still obtain closing cost assistance or other incentives from the builder. Sometimes the buyers need to be ready to demonstrate why the loan they want is better than the one offered by the builder.”

Mr. Mendelson says there are several areas where borrowers should make a careful comparison of multiple loans, including whether they are paying points.

A point, which is equal to 1 percent of the loan amount, is a fee borrowers can pay at settlement to lower their interest rate. The more points paid, the lower the interest rate (and therefore monthly payments).

“People are programmed not to pay points because they are concerned about the upfront costs, but sometimes it makes sense to pay them, especially if you plan on staying [in a home] a long time,” says Mr. Mendelson.

It is important to make sure that, when comparing loans, the points are considered. On a $300,000 loan with 2 points, the upfront cost will be $6,000. If one lender offers an interest rate of 6 percent with zero points and the other offers that same rate with 2 points, the borrowers will be paying an additional $6,000 for their home.

“Most consumers want the lowest interest rate, but this usually means they may need to pay points, which add to their upfront costs,” says Ms. Sheehan. “If the builder is paying all the closing costs and they can get a low interest rate, that may be the best deal going. Borrowers just need to make sure they understand both the interest rate and the points and what their payments will be.”

In addition to considering points, borrowers should compare the interest rate, particularly the annual percentage rate (APR) to evaluate the mortgages. Lenders are required to provide a good-faith estimate, which will allow borrowers to compare the fees to be paid at settlement along with their monthly housing costs.

“Buyers may think a difference of one-quarter of a percent in their interest rate doesn’t matter much, but over 30 years that means a lot more will be paid in interest,” says Mr. Masciola.

Mr. Masciola says that consumers need to be particularly careful to make sure they are getting a fixed-rate loan, not an adjustable-rate loan where the terms will change after a set amount of time. They also need to evaluate their long-term household finances before committing to a mortgage.

Working with a builder’s preferred or affiliated lender may often be the best option for new homebuyers, as long as they have done their homework.

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