Once you decide on building a new home in a master-planned community, one of the most common questions is whether or not your should use the builder’s recommended lender.
Depending on the situation, this can either mean the lender is part of the builder's own company, or in some cases it can just mean they are closely aligned.
There are pros and cons to both sides of going with the builder's lender for your financing, so let's take a look at both sides of the coin.
Reasons to Work with the Builder’s Lender
On the surface, the builder-lender relationship is supposed to make the entire process easier for everyone. Since they have an existing relationship, the builder and lender theoretically should be able to get your deal done quicker than someone from outside their network.
One of the biggest reasons to work with the builder’s lender is that the builder likely offers some great incentives for doing so. This typically means credit towards closing costs or free builder upgrades.
Another strong reason for working with the builder’s lender is that they will already have all of the necessary paperwork in place to get the mortgage finalized. You won’t be required to track down things like HOA documents and the lender will already have worked with appraisers in your neighborhood.
This combination of incentives and a smooth paperwork and closing process makes going with the builder’s lender the best option in many cases.
Reasons Not to Work with the Builder’s Lender
On the other hand, working with a builder and lender that have an existing relationship can expose you to being taken advantage of if you are not careful and diligent in your research.
There are many cases where the cost of those “great” incentives the builder offers is offset by a number of factors the lender builds into your loan. This could come in the form of higher interest rates or higher fees in your closing costs.
Depending on how big your mortgage is, paying just an extra half percent on your mortgage over the next 30 years could easily offset the cost of that $10,000 upgrade the builder is offering, so keep a close eye on rates and fees when doing your mortgage shopping.
So What Should You Do?
The bottom line is that no matter how good the deal from the builder's lender seems, you should definitely shop around for your mortgage. It is important to keep in mind that you are free to get your mortgage from whatever lender you like and the builder cannot legally force you into using their lender.
Sometimes the incentives offered by the builder and the convenience of using their lender makes it an easy decision. In other cases you might find that the builder’s lender is offering you a costlier deal and you can do better elsewhere and pay for those incentives yourself with the savings.
The only way to properly compare the incentives the builder might be offering with the extra charges their lender might be building into your loan is to get an outside opinion (or two) from another lender.
The more options you have to compare, the more qualified you will be to make the best decision for your individual situation.