September 21st, 2017
by Sean Hess, Owner, Broker, Author
Author’s Note: This is an excerpt from my upcoming book, tentatively titled “How To Buy A House: New Construction Edition. Find the Best House, Make the Best Offer, And Live Happily Ever After.”
More Fast Choices: Should You Use The Builder’s Lender?
Many builders will offer to pay your closing costs on the loan (and sometimes offer extra incentives on the home itself), but only if you use their lender. They’re going to try to make you choose between lenders at the worst possible moment: When you sign the contract.
When I bought my new home, I used an outside lender. My lender and I talked about this ahead of time. He was pretty much resigned to losing me because, in his own words, “The closing-cost money is money you just can’t throw away.”
But I had already budgeted for the closing costs. You pay for them one way or another, regardless of how the deal is structured. It could be through a higher interest rate, or it could be through a higher overall price on the home.
My goal was to get the house, not to avoid closing costs. I chose my lender for a reason: He would be straight with me and tell me everything I needed to do to close on the house. I knew he would be there if I called him with a question. I knew he would do everything possible to get me the best rate and at the same time give me the best advice.
There were some other issues as well. My company worked with this builder’s lender previously, and the builder’s lender was not very good. In one case, they had given a buyer such bad financial advice structuring the deal that the buyer lost the home the day after closing because it didn’t clear federal lending guidelines on a VA loan. That’s not a lender I want to be working with for my own home.
Plus, I wasn’t sure I could get in touch with them when I needed to, or if they would give me the proper direction to close the loan and get the house.
I also didn’t want the closing costs rolled into the loan itself, because the upshot of rolling costs into a loan is that you get to pay for those costs, with interest, for as long as that loan exists.
Those are huge decisions to make when you’re sitting in a model home, already trying to figure out what elevation and colors you want, who gets what room, and do you really want the gourmet kitchen package or the 3-car garage? What I’m saying is, you get really distracted when buying a new house.
The moral is to get your ducks in a row by having a lender in place already, before you ever hit a model home (having a Realtor with you at signing will also be a big plus … but more on that later). Only then can you make an educated choice on using the builder’s lender.
So what are the advantages to using the builder’s lender? You will get some nicer upgrades or maybe even a nicer house. It will also improve your cash flow at the time of closing.
Some things to consider: If you plan on only being in the home for five years (or less), maybe it makes sense to roll in the closing costs and take the upgrades. You will pay more towards interest in the short term, but the house will look nicer when you go to sell it.
If you plan on being in the home longer, however, shop the best rate, regardless of the lender. If you take the builder’s lender and roll in the closing costs, or end up with a higher price to get “free” closing costs and better upgrades, you’ll still be paying for the upgrades 15 years later (well after the upgrades are out of style). Even worse, if you refinance down the road (and thus reset the loan) when you renovate the kitchen, you’ll still be paying interest on those original “upgrades” from back in the dark ages (essentially paying interest on the original build and the renovation).
Now, should you just ditch the builder lender (or other in-person lender) and use an online lender instead?
More excerpts coming soon…