You've just put a contract down on a new house. Not just new to you, but brand new. As in new construction. You picked out your lot, your plan, your landscaping and even the color of your counter tops. What's even better is that your builder also owns a mortgage company and if you get a mortgage from their firm they'll either give you upgrades worth $5,000 or they'll pay 1 percent of the $200,000 sale price toward your closing costs.

What a deal, right? Perhaps.

Builder-owned mortgage companies are not necessarily anything new, they're just more common than in the past. Now it seems that every builder is also a lender, or at least has an official relationship with one. But you'll need to ask a few questions and really compare apples to apples to see if indeed the builder's mortgage company is really giving you that special deal.

Disclosure laws require that any controlled business arrangement (CBA) between a lender and a builder must be disclosed up-front. If the builder offers any incentive to use a particular lender or gets any money from that referral, such deals must be disclosed to you, the home buyer.

If you're offered any special arrangements by using one particular lender over another, simply ask the builder if they're getting compensated for that referral. If they do get compensated by referring business, you need to know about it.

If your sales agent says you'll get upgrades worth $5,000 by using the builder's mortgage company, simply ask that any upgrade offers be independent of the home's contract price. In other words, like buying a car, "give me the best deal on the house first, we'll talk about financing later." After securing a final sale price, then ask to see what the builder can offer in terms of free upgrades and determine if they're worthwhile.

Many lenders affiliated with builders are mortgage brokers. Certainly no concern there, but the point is that one mortgage broker gets their mortgage product from pretty much the same places as all mortgage brokers ... from different mortgage bankers. This means that given a level playing field, you shouldn't really see a wide disparity of rates for identical mortgages. This is where a little due diligence on your part comes into play.

You need to compare rates. Sit down and spend a couple of hours to contacting various mortgage companies for their rates and fees. See what's available online. It can get confusing sometimes, but by getting quotes for the same exact mortgage type in the same time period you should get a good idea of what's available.

Next, compare those figures with the offer from the builder's company. Remember, in our example they are offering to pay 1 percent of the purchase price toward your closing costs -- but also remember that unless their rates are the same as the other quotes this may not be a good deal.

Why?

Simply increasing your interest rate by a small amount, the lender can make enough money selling the loan to pay $2,000 of your closing costs. For that matter, pretty much any lender can. If the builder's rates are higher than what you've been quoted, you can guess how they're able to offer you such a deal on closing costs or upgrades.

Can you get a good deal from a builder's favorite lender? Sometimes yes, sometimes no -- but you need to compare loan offers with care to determine what financing is best for you.

For more articles by David Reed, please press here.

Published: May 10, 2001

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