Should You Use A Homebuilder's Preferred Lender?

Sometimes it's best to work with a preferred lender, but not always.

People who are buying a newly built home or having one built from scratch can choose from a number of different ways to pay for it.

If you need a mortgage loan, the lender you choose can give you one. You could also go with the lender chosen by the builder if the builder offers financing in-house or works with a bank.

You are in no way required to choose the loan that your builder suggests. Also, if you want to make sure that the terms of your house loan are the best they can be, you should do your research to find the lowest possible interest rate.

This could be good for the builder, the lender, and maybe even the buyer as well.

Most home builders have a "preferred lender" in place, who they say will look out for the best interests of the buyer by giving them a better financing option and making things easier for them.

The buyer meets the builder's preferred lender through the builder, and the preferred lender helps the builder get the buyer preapproved.

So, going with the lender that your home builder recommends could save you time and make things easier for you.

But the loan must be in your best interest, just like any other mortgage.

To make sure you're getting the best deal on your new house, you should talk to a few different lenders and compare their interest rates and closing costs before going with the one your builder suggests.

The way that preferred lenders do business

The builder's preferred lender and the construction business are expected to work well together. They should be able to speed up the process of buying a home by approving building plans and giving the borrower the option to lock in a rate that will stay in place until construction is finished.

Can my builder force me to use the lender they suggest?

You can rest easy knowing that you don't have to choose the in-house financing or linked lender that your builder offers you.

Builders can't force buyers to use a preferred or affiliated lender. Before signing, buyers are not legally bound to any one lender, and builders are not allowed to charge buyers more if they choose to use a different loan.

In addition to requiring preapproval for a mortgage, RESPA rules say that a buyer can't be forced to choose a certain lender for the closing of a mortgage transaction.

It also goes against the goal of many other fair lending standards, which were put in place to make the process of buying a home more open and honest for everyone.

If your builder tries to force you to use the company's preferred lender, you should know what your legal options are.

You can refuse to sign any paperwork about the building or the loan, and you can even ask that the requirements be taken out of the agreement. If you find out that the builder put a clause in your purchase agreement that says you have to use their recommended lender, you can either hire an attorney to fix the problem or back out of the deal.

Don't be surprised, though, if your builder tries to get you to work with its preferred lender by giving you incentives and sweetening the deal, even if they can't make you.

Using the loan that your builder prefers has a lot of pros.

If you go with a builder's recommended lender, you may save money and find it easier to get a loan.

If a buyer chooses a preferred lender, they may be eligible for extra benefits and perks, such as seller credits toward closing costs, home improvements for the buyer's home, and other perks.

If you choose one path instead of the other, the builder or lender is less likely to turn down your application because of how long it took you to get financing. As an added bonus, in-house lenders often offer very long rate lock periods that work with your building schedule. Most traditional lenders only let you lock in your rate for up to 90 to 180 days, so you don't usually have this kind of freedom.

You can also save time by going with the lender that your builder works with.

When you choose a lender that a builder likes, it is in everyone's best interest for the deal to go through smoothly.

When a lender and a builder have a good relationship, it's usually because they work well together, their process is streamlined, and they have a higher rate of loan approval.

Using the loan that your builder prefers may have some cons.

On the other hand, it can be risky to choose a lender who is also a partner in the deal.

One of the problems is that the lender is also the builder, which adds to the list of problems. When the same company that finances the home is also the company that builds and sells the home, there could be a conflict of interest. Even though this doesn't necessarily mean that the buyer will get a worse offer or interest rate, a buyer should be careful because of this.

Think about the possibility that the recommended lender would try too hard to please the builder or seller instead of the buyer and might not be acting in the buyer's best interest.

If you choose to work with the lender your builder recommends, you run the risk of getting a less favorable loan offer. This is one of the biggest risks you take on. If you don't compare what different lenders have to offer and shop around, you might end up with a higher interest rate and worse loan terms than if you had done your research.

There is a simple way to solve this problem, which is good news.

You can find the best interest rate by getting pre-approval from many lenders and comparing the terms of their different offers.

When compared to the time it takes to approve an already-built home, the process for a newly-built home will take a little bit longer. But if you know that a lower mortgage rate could save you thousands of dollars, you'll probably decide that the extra work is worth it.

Why builders have preferred mortgage lenders

It shouldn't come as much of a surprise that many construction companies and contractors choose to work with an outside lender or offer their own financing options in-house. Because of this, buyers, who will almost always need a mortgage loan in the end, will find it easier to buy a home.

Most of the time, homebuilders have a lender partner who is only connected to them for financial reasons and to increase the profits they make from selling both new and old homes. In some situations, builders may have a preferred lender because they know and trust that lender or have done business with them in the past.

In addition to money, the builder likes to be in charge of the whole process. The builder's lender may try harder to get a buyer a loan and let the builder know more quickly if the buyer doesn't qualify for a loan. It's easy to understand why a builder would want to have this much power over their project.

Most of the time, these advantages work to the buyer's benefit as well as the builder's. If you do find a better deal, though, you should definitely go with the company that will save you the most money.

It is against the law for your builder to force you to use the lender it recommends, so you shouldn't listen to anyone who tries to do so. If the lender doesn't offer rates that are comparable to what other institutions offer, it's best to look for financing somewhere else.

Bottom line: should you go with the lender that your builder suggests?

In fact, the lender your builder recommends or has on staff may be able to give you the best loan deal, saving you the most money and giving you the most time.

They might offer financial incentives, a rate lock for a longer time, or a lower interest rate than their competitors. But as a borrower, if you don't do the research you need to, you won't know this for sure.

‍