Think about brand loyalty for a second. You buy the same dish soap, upgrade to each new iPhone version, or continue to see the same hairstylist.
Home builders are no different, often partnering with the same mortgage lenders again and again. Having developed a fruitful relationship, it’s tempting for them to direct home buyers to these lenders. But are there boundaries that builders shouldn’t cross?
The myth that buying a new construction requires you to use the builder’s preferred lender exists for a reason. Here are the facts about getting a construction loan for your newly built home.
Dispelling Myths About Builders and Construction Loans
Securing a mortgage—or construction loan—is daunting. Gathering financial information, undergoing credit checks, and determining how much you can put down is plenty to deal with, but sometimes builders add more burden. Whether it’s well-intentioned or downright pushy, they may try to influence your choice of lender. The catch? That’s not any builder’s right.
Builders cannot force buyers to use their lender.
Do you have a lender in mind or want the flexibility to shop around? That’s your prerogative, as builders can’t force their preferred lender(s) on you. You have unique desires and needs, and being swayed one way or the other violates the Real Estate Settlement Procedures Act (RESPA).
RESPA prohibits paid referrals or kickbacks to affiliate mortgage companies and likewise prohibits mortgage lenders from incentivizing builders to refer home buyers. Of course, a preferred lender may offer a better deal anyway, and if you choose them on your own, your builder can still require pre-approval.
Builders cannot charge more if a buyer chooses their own lender.
Although they’re free to hold their own opinions about your selection, builders can’t legally penalize you for not using a preferred lender by driving up your home’s price. They can, however, withhold incentives that would come along with doing business with their pick, including:
- Reduced home price
- Closing cost assistance
- Complimentary home upgrades
Stand Your Ground During Your Search
Building a new home is a massive investment, and your decisions are your own. Are you facing a pushy builder? It’s your right to take certain actions:
- Refuse to sign any documents that include a preferred lender requirement.
- Request that any such requirements be removed from your agreement.
If they refuse to accommodate you, it’s OK to escalate matters. Hire an attorney and, if necessary, walk away from the deal.
Shop around for the best deal on your mortgage.
There’s no way to know who might offer you the best deal if you don’t do your homework. Start by figuring out how much loan you can afford and the type of mortgage that’s the best fit. Then, get a construction loan estimate from one lender to streamline quotes and pre-approvals from additional lenders—including banks, mortgage brokers, and mortgage banks.
From here, compare the lenders’ loan estimates—including interest rates, terms, and services. Explore these and other key details in each estimate to get a construction loan that meets your needs, including:
- The loan amount you’re approved for, excluding closing costs
- The quoted interest rate and whether it’s conventional or variable
- Closing costs, ranging an average of 2-6 percent of the loan amount
- Prepaid interest, including costs for homeowners insurance, mortgage insurance, and property taxes
- Third-party fees that may vary between lenders, such as title insurance services
- Escrow expenses at closing to fund homeowners insurance premiums and property taxes
- Monthly payment estimate, including the principal, interest, mortgage insurance, and more
Choose the Loan That Works for You
Your loan, your choice. Although it doesn’t hurt to hear your builder out on what their chosen lender offers, they cannot force you to sign with their lender or change pricing terms as a result.
And you shouldn’t be rushing to select a mortgage or construction loan provider anyway. The best bet? Take your time and compare between several choices for the most financially appropriate fit. FFB has the educational resources to ensure you have all the information you need. Subscribe to our blog to access the latest financial guidance for navigating your homebuying journey.
About the Author
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First Federal Bank Mortgage Lenders
We’re honored to be your partner in the homebuying process. And like any good relationship, it helps to know who you’re working with. A home is the most important purchase we can make in a lifetime. At FFB, we’re built to deliver exceptional customer service from your first call to your closing day and beyond. First Federal Bank has helped families find the right loan to fit their needs for decades.