Should I Use the Home Builder’s Mortgage Lender or a Different One?

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Lately, new home sales have surged as existing housing supply continues to be hard to come by.

This is partially because mortgage rates more than doubled in less than two years, effectively locking in existing homeowners.

With many of these homeowners unwilling to budge, home builders have gained a lot more market share.

After all, they need to move their inventory, and there isn’t a borrower living in the property with a low interest rate to worry about.

To boost sales in spite of high rates, many builders have offered impressive mortgage rate deals that everyday lenders just can’t seem to match. Does this mean there’s no need to look anywhere else?

Most Home Builders Have Their Own Financing Department

Despite being in the business of building homes, many home builders also operate financing divisions.

This means they are also fully-fledged mortgage lenders with the ability to offer home loans on the properties they sell.

And several of them are quite large. For example, D.R. Horton’s DHI Mortgage is a top-25 mortgage lender in the nation. The same goes for Lennar Mortgage.

Both companies originate tens of billions of dollars in mortgages annually to their home buyer customers.

On top of this, they also operate title/escrow companies and insurance agencies. This means a prospective home buyer can do one-stop shopping.

Convenience aside, these builder lenders are also able to offer aggressive financing offers that outside lenders often can’t beat.

So if you’re buying a new home, why look anywhere else?

It’s Wise to Speak with More Than One Mortgage Lender

Even if your home builder doubles as a lender, it’s always prudent to get more than a single mortgage rate quote.

There are studies that prove those who obtain 2-3 quotes (or even more) wind up with a lower rate and monthly savings for years to come.

So even if the home builder’s lender is offering you a spectacular deal, it’s still beneficial to shop your rate.

Sure, you might speak with a third-party lender (or two) and find that they just can’t come close. But if you don’t take the time to do that, you won’t know what else is out there.

In addition, having other quotes in hand allows you to negotiate your mortgage rate with the home builder.

If the builder knows you haven’t looked elsewhere, they might not offer you their lowest rate. With other offers in hand, their deal might get better.

You can also learn a thing or two by speaking to different lenders, mortgage brokers, and so on.

This can make you a more confident home buyer who knows the ins and outs of the process better than someone being led by just one company.

Home Builder Mortgage Rates Are Typically Hard to Beat

Now, from what I’ve seen lately, home builder mortgage rates are hard to beat. They’re buying down their rates aggressively to draw in buyers.

They’re also doing this out of necessity because home prices are so high. This allows more borrowers to qualify for a mortgage and keep their DTI ratio below maximum thresholds.

Remember, they have to move their inventory. Otherwise it sits and costs them money. At the same time, they don’t want to lower their prices.

If they sell homes for less, it could hurt appraised values on subsequent home sales. So it’s more beneficial for them to offer you a lower mortgage rate instead.

This allows them to keep the purchase price intact, while providing you monthly payment relief.

It’s a win-win for both home buyer and home seller. And it makes it very difficult for outside lenders to compete.

They’re able to sell the home more easily and win the loan at the same time.

Lately, home builders have offered both temporary and permanent buydowns, or even a combination of both.

For example, I’ve seen home builder lenders offer 30-year fixed rates as low as 5.5%, with a temporary 2-1 buydown for the first two years.

This means a home buyer gets a rate of 3.5% in year one, 4.5% in year two, and 5.5% for the remainder of the loan term.

Chances are an unaffiliated mortgage lender just won’t be able to compete.

Consider Using Credits from a Home Seller to Buy Down Your Rate

One strategy you can employ if you don’t want to buy a new home is to ask for a credit from the seller.

Known as seller concessions, these can be used to buy down the mortgage rate to something that resembles what new home builders are offering.

Instead of asking for a home price reduction, you can use these credits to pay discount points, which in turn lower the mortgage rate.

This is essentially what the home builder lenders are doing, and there’s really no reason it can’t be done on an existing home.

If you want to go a step further, you could also ask for a credit fro the real estate agent as well.

This may allow you to snag a lower mortgage rate and reduce your closing costs at the same time.

In the end, you might have a deal that resembles that of the builder’s, but on an existing home.

While home builders like to refer to existing homes as “used homes,” they are often located in more desirable, central locations. And they might be bigger too.

As such, it can be in your best interest to purchase a used home as opposed to a newly-built one.

So if the financing is holding you back, the use of seller concessions can make the deal pencil.

There Are Other Advantages to Using the Builder’s Mortgage Lender Beyond Price

While I’ve mostly focused on price, or mortgage rates specifically, there are other perks to using the builder’s captive lender.

For one, they are affiliated businesses, so communication should be strong. There should be a direct line between builder and lender throughout the loan process.

They should know each other’s timelines and processes in and out, which ostensibly means fewer hiccups and issues.

Conversely, an outside lender could have difficulty getting in touch with the builder to check status. And this could result in unnecessary delays and problems.

Of course, that’s how it’s supposed to work. In reality, this might not be the case given the many mixed reviews I’ve come across from builder lenders.

Despite their close relationship with the builder, somehow lots of customers still walk away upset. But this could just boil down to home buying being very emotional in general.

And it could be even worse when using an outside lender if the two companies don’t cooperate well.

In summary, if buying a new home you’ll likely be pushed to use their in-house lender. You are not required to do so. You can use any lender, bank, credit union, or broker you choose.

But there are certainly perks, including mortgage rate specials (the #1 reason to use them) and perhaps the convenience of one-stop shopping.

However, even if you like what the builder’s lender has to offer, you should still take the time to speak with outside lenders and gather additional quotes.

Pros and Cons of Using the Home Builder’s Lender

The Pros

  • The convenience of one-stop shopping
  • Get your new home and mortgage all in one place
  • Affiliated lender might communicate better with the builder
  • Can offer special mortgage rates to home buyer customers
  • Mortgage process is short-lived, rate stays with you for decades potentially
  • Long rate locks that match the longer home buying/building process
  • Often operate their own title/escrow and insurance agencies as well

The Cons

  • Lots of mixed/negative reviews for home builder lenders
  • Mortgage rate specials are often limited to certain homes
  • May be enticed to buy in an area because the financing alone
  • May offer limited loan choices

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