Don’t Get Taken to the Cleaners by Builders, Their Lenders

January 31, 2009 by Danilo Bogdanovic
Filed under Buyer Resources, New Construction/Builders

Many builders tie their incentives to the use of the builder’s lender and title company. On the outside, you may think it’s no big deal. The builder just wants to make a few extra bucks on the back-end while you get tens of thousands off of the price of the home.

But let’s dig deeper…

Let’s say you’re looking around for resale (non-new construction) single-family homes and you really like a few homes you saw in the $600K to $650K range. But, after speaking with your lender and seeing how they crunched the numbers, you see that the top end of your approval amount and comfort price range is $550K (based on a 30-year fixed-rate mortgage at 4.75 percent at 1 point).

What do you do?

You adjust your search to properties priced no more than $550K and continue your search. Once you find a property you like, your agent does a market analysis and determines that the property is over-priced by $40K. Despite you really wanting the property, there’s no way you’re going to overpay for a property so you either offer them less or keep on looking for other properties.

Now let’s say that you fall in love with a new construction single-family home priced at $650K.

You contact the builder’s lender, fill out and application and let them crunch their numbers. As the lender crunches the number, they come to the same conclusion – you’re really only approved up to $550K.

But the lender knows that the builder doesn’t have any lower priced single-family homes available. If the lender tells you that you can’t afford to buy that house, you may go to another community and another builder. If the other builder’s lender somehow finds a way to approve you up to $650K, you may buy a single family home in the other builder’s community. That means the builder and the builder’s lender will lose a home sale AND the money from your loan AND the money you’ll pay the builder’s title company at closing.

What does the lender do?

Many times, they find a way to get you approved up to $650K – even if that means that it’s not in your best interest.

Here’s how the two scenarios differ:

In the first scenario, your interests are being looked out for by various people, none of whom are anxious for you to buy any specific property. You don’t get stuck in a loan you can’t afford to pay and you don’t overpay for a home.

In the second scenario, no one is looking out for your best interests. The builder, the builder’s lender and the title company are all tied together and looking out for each other’s best interest and pocket book – not yours. They want to make a sale and get you to pay the most possible for the home. It would be a conflict of interest for the builder to look out for your best interests because it would mean that their sales and profits would go down.

(And do you think that the builder’s sales rep/manager is going to tell you that the home is overpriced? HA! Yeah, right…)

Moral of the story…

Make sure you understand that builders, their sales rep/manager, their affiliated lender and title company are only looking out for one thing – their own best interests. They’re not there to make sure you don’t get in over your head nor that you get a good deal. If you don’t believe me, check out this real life example.

Slightly off-topic, but very relevant…

This is why the current battle by HUD to pass new RESPA laws banning builders from tying incentives to the use of their affiliated lenders needs to be won by HUD. The new law was passed and was supposed to go into effect on January 16, but its been put on hold, probably because of the law suit by the National Association of Home Builders (NAHB) who knows that it would cut into their bottom line regardless of the good it would do home buyers.