BUILDER FINANCING: Pros and Cons

Nowadays, you can arrange mortgage financing for a new home construction through builder’s wholly owned mortgage subsidiaries or affiliate relationships with outside mortgage companies.

You may be offered numerous compelling and advantageous sales incentives on the new house, such as upgrades or price breaks. Some of the advantages are:

  • Fast – It may reduce the time needed to proceed from application through settlement. The entire process is mostly under the control of the builder, and it can speed up the processing time.
  • Approval rate is high – It may also give you a slight advantage on approval of your financing application. The reason is that the builders want you to buy the home, and they are more likely to work with mortgage lenders who are eager to grant you mortgage application. The builder’s income depends on the speedy approval and many potential buyers.
  • Compelling incentives – It may save you money on the total incentives you’re being offered. The builder may reduce the value of the home provided that you obtain their financing packages. Additionally, non-financial incentives, e.g. providing with from fireplace to landscaping, are becoming really popular too.
  • Flexible deadlines – Sometimes you may need more time in order to close, and this type of financing may come handy as the builder’s lender might be more flexible to work with.

On the other hand, you may not want to go with a process that is fast and easy. The builder’s mortgage terms, i.e. interest rate, fees and loan types, may not be the most favorable available out there. You need to be aware of some of the disadvantages or cons of builder’s financing. Here are some of them:

  • Beware of high origination fees. All fees should always be fully disclosed. Pay close attention to this figure to see exactly what you’re being charged. Most lenders charge 1-2% of the loan amount, although this can vary.  If you do you research, you may be able to avoid the loan origination fee in general.
  • Beware of higher rates. According to the National Association of Mortgage Brokers independent lender usually offer interest rates of 1/8 to 1/4 percent lower than what you can get from the builder’s affiliated lenders.
  • Beware of higher closing costs. You can end up paying more in the long run. The home builder may offer some amount towards closing from their preferred lender, and then neglect to point out to a clause in the contract that caped that to certain percentage of total purchase price.
  • Beware of possible price manipulation. Even though Federal law states that any price discount offered by the builder’s affiliated lenders should provide genuine savings, you have to be careful that discount incentives do not depend on other hidden charges elsewhere.

You have to take time to shop around in order to find the best option that suits you. You can always check what the builder is offering and compare it with what is being offered in the marketplace.

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Posted in Blog, Blog, Tips.