Here’s one for ya! When you go to a track builder (like KB etc.) they all have a “preferred lender” that they pretty much make you use. Do you ever wonder why and how that effects you? Well, I am going to tell you. I think that it is one of our industry’s dirty little secrets that is complete bullshit.
Now, first, I will tell you that I personally am a “preferred lender” for a homebuilder here. Well, one of them (there are 2 of us)…and I jokingly refer to myself as the “unpreferred lender” because I don’t give them the kickbacks that the other lender gives. I just provide good service and much lower rates and fees to the customer, which is evidently not important. She gets the referrals (most of them) and wins most of the clients because they don’t even get a chance to talk to me…but when they do, I win every time. I just don’t (and won’t) buy the business from the builder. Sorry.
That is also not to say that I am not grateful for being on this list for so long (longest one that they have)…but I have always been the “unpreferred preferred lender” because I don’t do the “extras “.
I am mainly the back-up and I am ok with that.
Anyway, let me tell you how this works. First, the reason that builders have these lenders is for 2 reasons: control and profitability. Unfortunately, there are a LOT of crappy loan officers out there and they give crap pre-approvals and they have no idea what they are doing. Builders certainly don’t want to to through the expense of building a home for someone who doesn’t qualify…hence, they want you to work with someone that they trust so that when they say you are good to go, you are actually good to go. Make sense? On the profit side, the lender can pick up costs that the builder would usually have to pay (usually the title policy). So…more profit for the builder.
There are 3 different kinds of lenders for builders:
- Builder-owned mortgage company (like DR Horton and DHI Mortgage) where the builder or parent company of the builder owns the mortgage company. This is done basically to maximize profitability and control.
- ABA Relationship is where a mortgage company joins up with a builder to only do loans for them and the mortgage company either pays “rent” or pays to be part of the builder. Here is a definition I found, “An Affiliated Business Arrangement (AfBA) exists when a person in a position to refer real estate settlement services has an affiliate relationship with or a direct beneficial ownership interest in an entity to which settlement business is referred such as a joint venture title or mortgage entity.”
- Mortgage Company NOT owned or affiliated with builder, but pays for title or additional fees for the buyer/builder in exchange for the builder referring them business.
The builders all tie incentives into using the “preferred lenders”, but the crappy part about all of this is: The consumer is usually NOT going to get the best deal out there on their home loan, but often will still be forced to use these companies because the “incentives” are too great to lose. I mean, if the builder will only pay $5000 of closing costs if you use XXX, but they are .25 higher in rate than everyone else, it is really hard to throw away that $5k. Imagine what it would be like if they still give you the $5k AND you were able to shop around and get the best deal….hmmmm. But then the builder would lose control…and like I said before, they don’t want to be building houses for people that don’t qualify though, right?
Why are the preferred lenders so much higher in fees, rate etc. most times?? Because in order to be a part of it all, they must typically pay some part of what would have been the builder’s fees…mainly the title policy, which is quite expensive. Guess what happens though? In the end, the consumer pays more because that money HAS to come from somewhere…you squeeze a balloon from one side and the other side gets bigger…all of that air is still there…just in a different place. Get it? So, what typically happens is this… “sure we will pay your title policy”…but in order to make up for that you are going to pay an unnecessary origination fee that we are going to charge you. Your fees will be higher…but hey, we are going to pay your title policy so it evens out. What the hell is that?? Yeah. Bullshit, right. Nothing is free. That money has to come from somewhere. “Oh, and since we the lender are paying for a bunch of other stuff for the builder, our fees and rates are going to be higher because, well, we need to pay for the extras that we do somehow.”
Now I will say that First United does it differently than anyone else that I know of. We don’t believe in jacking up fees and rates to pay for the title policy. Us loan officers take less commission when we have a builder relationship. The consumer will still get the best rates and the lowest fees. I just make less money on the loans. See? The money comes from SOMEWHERE, right? To my knowledge, we are the only ones that do it that way. Its pretty cool, but definitely rare.
Every other place that I have been and every place that I know currently and for the past 20 years jacks up the rate or fees in order to compensate for having to pay for fees for the builder. Remember, nothing is free.
The part that stinks is this: Typically when you buy a new home like this, you are NOT going to get the best deal on your home loan. You lose the ability to shop for the best deal because too many incentives for the house are tied to using a lender that is not necessarily “good” for you. Profit and control. I get it. It’s all a shell game though.
It just stinks for the consumer because it backs them into a corner and makes them use someone who they would not necessarily use if they had a choice.
The worst part though? The builder KNOWS that its customers aren’t getting the best deal on their home loan…but they don’t care. They will refer all day, any day, to a lender who gives them perks and kickbacks, but that they also know is jacking up rates and fees to pay for all of it.