- The Washington Times - Thursday, June 8, 2006

Q: I am under contract to purchase a new home scheduled to be completed

in about four months. The builder has agreed to contribute $10,000 toward our closing costs if we agree to use the builder’s designated lender.

We aren’t going to be locking in an interest rate for a couple of months, but I did some checking around, and it appears that the designated lender doesn’t have the most competitive mortgage rates. I’m happy to use the builder’s lender as long as the rates are competitive. Shouldn’t the builder’s lender match a quote I get from another mortgage company?

A: Yes, the lender should, but most usually don’t.

Unfortunately, builders often entice a buyer to use a mortgage company with which they have a business affiliation. There’s nothing wrong with that as long as it’s disclosed to the buyer.

The problem is that in most cases, the designated lender doesn’t offer competitive rates because the lender knows it has the buyer “locked in” as a result of the builder’s closing-cost contribution. The contract specifies the lender and the closing-cost credit but does not address the issue of whether the lender’s programs are competitive.

It’s like robbing Peter to pay Paul. Here’s an example: A few years ago, a client called me for a rate quote on a 30-year fixed-rate mortgage. I quoted him 6.50 percent with no points or origination fees. My client then solicited a quote for the same program from the builder’s designated lender. At 6.50 percent, the lender was charging three points. The loan amount was $250,000, and because one point is equal to 1 percent of the loan amount in cash, the builder’s lender was $7,500 more expensive.

My client’s purchase agreement stipulated a $10,000 closing-cost credit only if the buyer used the designated lender.

What’s this telling us, folks? The builder isn’t giving away $10,000. In order to receive it, the buyer must go to a lender that’s more expensive to the tune of $7,500. The net difference to the buyer is just $2,500.

As it turns out, my clients became fed up with the builder’s lender, took my deal of 6.50 percent with no points and sacrificed the builder’s seemingly generous contribution.

To answer your question, a contract is a contract. If you have a binding contract that stipulates that the $10,000 closing-cost contribution only becomes effective if you use the lender specified in the contract, you may have no choice. I hear about this kind of thing all the time. Buyers of new homes are too busy picking out carpet, paint and appliances to worry about the boring aspects of mortgage financing. All mortgage companies are basically the same, right?

Wrong. Your builder is making up much or all of his contribution through the affiliated mortgage company.

My advice? Get some reputable rate quotes in writing and, when you are ready to lock in the interest rate, insist that the mortgage company either match the quote or allow you to go to a different lender with the builder’s contribution intact. The squeaky wheel doesn’t always get the grease, but sometimes it does.

My advice for folks who haven’t yet signed a contract to purchase new construction? Add a clause to the contract allowing you to choose your own mortgage company without the threat of a closing-cost contribution being yanked. Home buyers shouldn’t be played like marionettes.

Henry Savage is president of PMC mortgage in Alexandria. Contact him by e-mail ([email protected]pmcmortgage.com).

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