As I’ve been working on loans for both new and existing homes during this busy start to the 2015 Home Buying season, I want to share some important insights as it relates to new home purchases. Owning a new home that you build from the ground up can be a great way to get exactly what you want, but it does come with some “watch-out” scenarios of which buyers should be aware. They can cost you more than you expect.
- Who’s really paying for this “Use our mortgage company” 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 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 going to cost you.
- Bring a Realtor
It seems like common sense, but it’s always smart to bring a Realtor no matter how much the builder’s 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 possible because I see it as a long-term relationship versus a single transaction. I do care if you spend too much or get in over your head financially. Even if we cannot do business together, I don’t want you to end 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.
- Non-Standard Contract – Why?
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.
- Appraised Value – can it really sell for that much?
Each lending company works with a panel of appraisers to assess the value of the homes they finance. With both the builder and their mortgage company dependent on home sales to stay in business, it can create a situation where your interests inadvertently may not be served. I had a new home build situation last year in which a builder’s sales agent told my client that if they had used their mortgage company the property would have appraised, as the one we got for the loan was lower than the sales price. 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 just to close a sale.
- Loan Sell-Off
A builder’s mortgage company typically sells off your loan once you close. This further reinforces my previous point: that they have no skin in the game should you have a loan amount for more than your house is really worth in 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.
- Too much personal info, too many people
Behind the magical curtain of lending, are the standard “rules” set by Fannie Mae/Freddie Mac that all lenders follow regarding loan 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 loan “buyers,” you might find yourself being asked for all the additional requirements/overlays for multiple mortgage companies. You could end up providing lots of information, to lots of people, who in the end really didn’t need that information.
Overall, purchasing a new home can give you 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. On the financing side, some builders 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.