Beware of Builders Bear­ing Gifts and Push­ing Lenders

The Washington Post Sunday - - Real Estate -

S o much of the fun in buy­ing a newly built home comes from be­ing able to choose the up­grades that tai­lor it to your tastes. Want steam vents in the shower? No prob­lem. With a swipe of the pen, they’re yours. And for now, at least, many builders are of­fer­ing such good­ies at no ex­tra cost.

Usu­ally, though, there’s a con­di­tion: The builder will pick up the tab only if you get your mort­gage through its pre­ferred lender.

Why not go along? The loan of­fi­cer may even be right there in the show­room, on a week­end, no less. A mort­gage with free­bies is bet­ter than a mort­gage with­out them, right?

It’s not quite so sim­ple, of course. A smart con­sumer will want to know that the loans be­ing of­fered by the pre­ferred lender re­ally are com­pet­i­tive with those avail­able on the out­side.

Tak­ing out the wrong mort­gage can be a very ex­pen­sive mis­take over the long term. An ex­pen­sive mort­gage could cost more than the real value of steam jets and gran­ite counter tops. And you won’t know if the pre­ferred lender’s of­fer­ings are over­priced, whether in terms of in­ter­est rate, pre­paid in­ter­est (known as points) or loan-re­lated fees, un­less you’ve al­ready talked to out­side lenders.

Builders can’t force you to use any par­tic­u­lar lender; fed­eral law pro­hibits it. Nor can they dic­tate whom you must use for other set­tle­ment ser­vices, such as the ti­tle com­pany or home­owner’s in­sur­ance provider. (Lenders can choose who will per­form the ap­praisal.)

Builders’ in­cen­tives th­ese days can be worth tens of thou­sands of dol­lars. Just last week, Fair­fax-based Brook­field Homes mailed a flier to my home (or to the “cur­rent res­i­dent”) tout­ing as much as $100,000 in in­cen­tives on its sin­gle-fam­ily houses in Vir­ginia. Among the in­cen­tives “cur­rent res­i­dent” could choose were fi­nanc­ing at 1.5 per­cent in­ter­est, two years of paid home­own­ers as­so­ci­a­tion dues or up­grades such as a fin­ished base­ment or finer floor cov­er­ings.

When that kind of money is at stake, does us­ing the builder’s pre­ferred lender re­ally re­main op­tional? Or is it an of­fer you can’t refuse?

That is a gray area un­der the fed­eral laws gov­ern­ing real es­tate set­tle­ments, said Brian Sul­li­van, a spokesman for the De­part­ment of Hous­ing and Ur­ban De­vel­op­ment.

“This puts a bur­den on shop­pers to look past the gran­ite coun­ter­tops and stain­less steel ap­pli­ances and try to de­ter­mine if there is a real dis­count or mere puffery,” Sul­li­van said. “You’ve got to shop.”

Fed­eral law pro­hibits kick­backs of fees or valu­able perks among lenders, bro­kers, ti­tle com­pa­nies or oth­ers in­volved in a real es­tate deal. How­ever, if a builder has an own­er­ship stake in a lend­ing busi­ness, the builder can share in the prof­its. That own­er­ship stake has to be re­vealed to you early in the deal, when the builder first makes the re­fer­ral.

Ry­land Homes, for ex­am­ple, has an in-house mort­gage com­pany, Ry­land Mort­gage, which deals only with peo­ple bor­row­ing to buy a home built by Ry­land. Brook­field Homes, the com­pany of­fer­ing as much as $100,000 in con­ces­sions, owns a mort­gage sub­sidiary called the Mort­gage Group. Al­though the law says builders can’t force you to use their in-house lenders, noth­ing says they can’t do their best to en­tice you to keep all your busi­ness un­der their roof.

In­deed, as long as the loans they of­fer are truly com­pet­i­tive with what you can get out­side the show­room, ap­ply­ing for a mort­gage with the ap­proved lender could be the way to go. One of the rea­sons builders have th­ese ar­range­ments is so a lend­ing snafu won’t de­lay the clos­ing.

“They want con­trol of us,” said Stu­art Tyrie, a vice pres­i­dent with Wells Fargo Home Mort­gage, one of the largest new-home lenders in the coun­try. Among the lo­cal builders with whom Wells Fargo has pre­ferred sta­tus are Winch­ester Homes, Craft­star Homes, and Miller and Smith.

Lenders who spe­cial­ize in new-home loans are used to deal­ing with the un­cer­tain timeta­bles as­so­ci­ated with con­struc­tion. On av­er­age, nine months pass be­tween the loan ap­pli­ca­tion and de­liv­ery of the fin­ished home, ac­cord­ing to Tyrie. With a new condo build­ing, that time could stretch well past a year, as de­vel­op­ers of­ten de­lay the start of con­struc­tion un­til they have sold a given num­ber of units. What if in­ter­est rates blip up to a level you can­not af­ford? For a fee, Wells Fargo al­lows bor­row­ers to lock in their in­ter­est rate for as long as two years, await­ing de­liv­ery of their new home. (Other lenders who cater to the new con­struc­tion mar­ket of­fer sim­i­lar deals.) That kind of in­ter­est-rate pro­tec­tion is an im­por­tant ben­e­fit if you have a con­tract to buy a prop­erty with an un­cer­tain de­liv­ery date.

Get ac­tual rate quotes from a cou­ple of lenders, and com­pare the types of loans they of­fer — be­fore you tour model homes.

“A bor­rower needs to get a good faith es­ti­mate” or a non­bind­ing list of clos­ing costs “from a lender out­side of the builder’s re­la­tion­ship and make sure the pro­gram the builder is of­fer­ing is in their long-term in­ter­est ver­sus over the short term,” said Mike Brad­shaw, the ex­ec­u­tive in charge of Bank of Amer­ica’s part­ner­ing ac­tiv­i­ties with builders and real es­tate bro­kers.

And if you can find a bet­ter mort­gage deal out­side the builder’s show­room, try to ne­go­ti­ate with the builder to give you those in­cen­tives any­way. If you have a rock-solid loan ap­proval in hand and you’re a ready and will­ing buyer proven to have enough money to swing the deal, a builder could find that to be an of­fer he can­not refuse. E-mail El­iz­a­beth Razzi at razzie@wash­post.com.

BY ISTOCKPHOTO

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