As I think about the upcoming year and some of the great subdivisions under development, I think we will see a definite uptick in new home ownership in the DFW Metroplex. Most of my clients who are considering this option have existing homes, which means that there should be enough inventory to meet the on-going demand in the area. Like others who are affected by increased real estate activity, including my Realtor friends, 2014 is gearing up to be a busy season.
As someone who has also considered a new home, I want to share some things to keep in mind when looking at a new home…especially when looking at financing options. Some are more competitive than others depending upon the incentives they offer, so it’s important to run the numbers. At a minimum, it’s still a good idea to do at least some level of price comparison in terms of rates and fees with a lender you trust.
First, never buy a new home without a Realtor regardless of how much the sales agent says you can save. A Realtor is your first line of defense to ensure you are getting a fair deal and that your rights are protected during the transaction. The second line of defense is your lender. As a mortgage lender, I want you to be in the best program to fit your needs because I see it as a long-term relationship versus a single transaction. I do care whether you spend too much or get in over your head financially. Even if we cannot do business together, I don’t want you ending up in a loan program that will cause problems later. If you’re thinking about using a builder’s mortgage company, please talk to at least one other lender to make sure you’re getting the loan program you think you are.
*Who’s really paying for this Incentive?
Well, clearly you are. It’s in there somewhere as builders are in the business of making money, not giving away homes. Whether in a 1% higher house price, slightly higher fees or a half point higher interest rate over the term of the loan – you will pay for it somehow. Since none of us are naïve enough to expect to get something for free, make sure you understand how you are covering for these incentives and the total cost of these incentives over the term of the loan. It’s reasonable to pay for incentives somewhere, but make sure you know how much they are really costing you.
If you’ve ever bought an existing home, you’ve probably used a standard contract. In Texas, we have one that was written and approved by the Texas Real Estate Commission (TREC). The purpose of this standard contract is to keep things as straightforward as possible for both the buyer and seller. Builders, however, do not always use this standard contract preferring to have their attorneys write a different version. Why? Well, that’s a great question you should ask your builder. I think if you put the TREC contract side-by-side with the builder’s contract, you will see it was not written with simplicity in mind. Make sure you have your Realtor and the sales agent walk you through each piece so you know what you’re committing to before you sign a contract.
Each lending company works with a panel of appraisers to assess the value of the homes they finance. Having the builder and mortgage company dependent on home sales to ultimately stay in business, can create a situation where your interests inadvertently may not be served. I had a new home build situation earlier this year in which a builder’s sales agent told my client that if they had used their mortgage company the property would have appraised. The purpose of an appraisal is to protect you, and the company who is ultimately going to own/service your loan, from paying too much for a property — not to close a sale.
A builder’s mortgage company typically sells off your loan once you close. This further reinforces the above point, that they have no skin in the game should you have a loan amount for more than your house is really worth on the market. Essentially, they wash their hands of any financial accountability once you close the deal. In addition, you have no say in who services your loan and the customer experience they provide. I recommend you price shop with a bank who will keep and service the loan so you can assess the trade-offs.
*Complex Underwriting Experience
Behind the magical curtain of lending, are the standard “rules” set by Fannie Mae/Freddie Mac we all follow regarding lending programs. These rules provide the foundation for all mortgage lending, however, the companies who purchase your loan after you close may have additional requirements known as “overlays.” Since a builder’s mortgage company maybe actively trying to shop your loan needs to several “buyers,” you might find yourself being asked for all the additional requirements/overlays for multiple loan companies. You could end up providing lots of information, to lots of people, who in the end really didn’t need that information.
Overall, owning a new home can be a great experience where you can have the kind of home you want without all the hassle of making changes to an existing home. I encourage you to use a Realtor who is savvy in your specific area and has done previous new home transactions. If you are uncertain who to use, I can refer you to a Realtor who is a good fit based upon your needs and preferences.
Happy new home hunting!