Surprise, surprise, surprise . . . builder directed financing creates ethic questions

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I recently read an article about this exact topic.  I can’t seem to track the article down, I think it may been within one of the mortgage-news sites that I subscribe to. 

One of the biggest mortgage shams contaminating the mortgage business is builder-forced financing.  For years, especially in the Atlanta Real Estate market, builders have “teamed-up” with “preferred” mortgage companies, offering to pay a certain amount of closing costs only if the buyer uses their “preferred” company.  I have posted at length in the past on this topic — and outlined the different scenarios.  But essentially, in the end, the builder may make a few extra $$ per transaction, play a few free rounds of golf a year (speculative), or add a few dollars to his bottom-line.  As HUD continues to investigate more and more into Affiliated Business Arrangements and sham-ABA’s (including title companies that are partially owned by Real Estate companies so that when you go to your Realtor’s “preferred” closing attorney, the Real Estate firm makes a few extra $$), my hope is that eventually this practice will be shut-down and that which is best for the consumer (competition and freedom of choice) will prevail.  If I can find the article to reference directly I’ll get it linked up to my blog.   

For now, for you, the consumer, here are two things you need to know.

1.  The service you receive from the “preferred” mortgage lender/broker will be average.  Maybe, slightly above average.

2.  The interest rate that you receive from the “preferred” mortgage lender/broker will be average.  But more than likely, slightly above average.

 3.  They know the math.  They know that if you DON’T take the closing costs from the builder (even though they are charging you a higher interest rate), they know it will take you 6 to 7 years to break-even on the exchange, and they know that you probably would rather have the cash now and take the, “well, I guess I could always refinance later” attitude.

What can you do about it?

Well, if you sign (or have already signed) a contract agreeing to the fact that the builder only has to pay $xx in closing costs, if you use their preferred mortgage company . . . there really isn’t anything you can do — see 1 through 3 above.

If you haven’t signed a contract, but are looking to purchase a new house, negotiate — and hold your agent to the task of negotiating for you.  Seriously, cross that section of the contract out and write in your own stipulation, “Builder agrees to pay $xx in closing costs and buyer is able to choose any mortgage lender or broker he or she chooses.  Should the buyer choose to use a mortgage provider that is not the builder’s preferred lender, buyer agrees to provide prequalification letter within 24 hours of binding agreement and to provide a credit/income approval letter within 7 days of binding agreement.”  Any builder that would refuse to sell you a house because you want him or her to pay for some of your closing AND let you choose who provides your mortgage financing is a builder who has lost his mind, his business-sense or quite possibly, both. 

On the other hand, if you decide that (despite the current not-so-builder-friendly market), that you are willing to stand for average service, above average rates, and an extra 0.25% in interest rate for the life of your loan (shazam! that could add up to over $4,000 over 7 years) – then, suit yourself.  Golly (or rather, ggawwwwllleeee), is that a double-coincidence, the average homeowner lives in a house around 7 years and the builder is offering to pay $4,000 in closing costs??  Wonder how they came up with that number???

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC.  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs, today’s interest rates, or the mortgage process in general, please visit www.hillsidelending.com.  

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