Must Know: Home Mortgage – How to decide between Builder’s lender and Outside lender?

For any home buyer, finding the right mortgage lender is a very important one and nailing down the lower rate with less fees is another key factors as well. If you are buying new home or building one, it gets bit complicated. These many builders associate their incentives depending on whether you are using their lender or not. So it is become a confusing decision for buyers when choosing the right mortgage lender. Let me help you out a bit in this post.

I get this question every time I deal with buyer who either build new home or buy new inventory home. It is not an easy decision because it involves few complicated numbers and I have to guide them to make a decision. As a person who got some financial education passing CFP exam, I try not to make it complicated and explain only steps what they need to do and how they can narrow down the option to determine their best choice.

This is what I always tell my clients, if you are building a home, you don’t have to worry about lender until you get closer to closing the home which is 45-60 days before home completion. Other buyers they need to worry about it as soon they signed the contract. First of all, do window shopping for lenders whether its builder lender or outside mortgage broker. Try to get the rate and fee information and compare them. Weed out lenders/mortgage brokers who don’t give competitive rates or charge too much fees. Once you narrow down a few, ask them to send Worksheet and GFE(Good Faith Estimate) for the loan amount with their promised rates.

Once you have these docs, it will give you a general information about interest rate, how much lender will charge for processing your loan, title charges, what are your loan prepaids and other property related fees. Let’s first worry about the lender fees.

Lender fees
In most cases, lender changes loan origination fees, documentation fees, courier fees, attorney fees etc.,. Compare that with builder’s lender. For example,
Builder’s lender fees = $5000 – $3000 builder closing cost credit = $2000 (still need to pay)
Outside lender = $1000 (Zero origination fees plus all other fees included)

In above, even after builder credit, you will be paying $1000 more with builder’s lender compared to outside lender. Many builders try to attract buyers to their lender by promising to pay 1% closing cost but eventually its a wash and they charge more lender fees above 1% closing cost contribution. So there is no real saving in going with the Builders lender unless there are parameter which favors. Let’s come back to that in a bit.

Interest Rate
Now, let’s get to the real meat of the topic, Interest rates which is very important. You will be stuck with this rate until you own the house or mortgage. So you should do better job in getting a competitive rate which will reduce your monthly payment. Even .5% difference in rate will have $25-$50 monthly payment increase per month depending on the purchase price. Most of the time builder’s rate will be always higher than outside lender. You should create a spreadsheet and calculate the monthly payment for each lender and see the difference in saving for a year and projecting to 5 years. Assuming you have $600 saving/year going with outside lender compared to builder’s lender. That’s approximately, $3000 savings for 5 years.

Title Service Fees
Third step, let’s figure out the title services cost. Title company cost will be same whether you go with outside or builders lender but only caveat builder might pay the title policy fee which is part of title company charges. Let’s say its $1500 and other title charges around $700. You will pay total $2200 if you go with outside lender whereas only pay $700 going with builder lender.

Next fees which will come into picture are Prepaid which are prepaids to an escrow account that’s worth 3 month of insurance and taxes plus interest payment for your loan amount for balance days in this month. The Escrow account prepaid can be avoided if you do an escrow account waiver. You can read more about its benefits in my another blog. It has no direct impact over your lender selection but lenders charge escrow waive fee of around .25% of your loan. Especially Builder’s lender charges and rarely waive for free but outside lender most of the time can be negotiated to waive for free. At this point let’s assume, both lenders waive the escrow fee for now.

Interest prepaid depends on the interest rate so it changes depending on the interest rate you lock with the lender. Still this doesn’t have any impact on lender selection.

Other Fees
Finally there are other fees like HOA transfer fee, Cap fee and HOA Annual fee and others which cannot be avoided whether you go with any lender and they don’t change because they are outside fees.

Let’s compare our numbers from the example now,
Builder’s Lender GFE = $2000(lender fees) + $700 (title) = $2700
Outside Lender GFE = $1000 + $2000 = $3000. Difference = $300 – Pay more with outside lender.
Savings going with outside lender due to low interest rate = $3000
Overall you will be saving $2700 going with outside lender.

Being derived to this point, there are other things which will impact this decision. Whether you have money to pay cover those extra fees during closing. Can the outside lender close on time or within the time limit provided by the builder? These questions will also drive the decision in some cases and few buyers don’t have a choice other than going with builder’s lender due to this restriction.

In summary, I just want to talk in detail about this topic and show which items you need to compare the most and decide whether you will save by going with outside lender in longer term even though you have to pay closing cost upfront. Just keep in mind, Builder’s lender are there to make money and they are not going to give it cheap so even though they give closing cost incentives it comes with more added cost compared to outside lenders. Keep these points in mind and make your decision accordingly. Also your Realtor should help you in this decision process as well.

About Vijaianand Thirnageswaram

I am a Proud Realtor of Texas, trying to guide and help clients to find their dream home and educate them to buy them for right price. I am also a Candidate for CFP who has more financial knowledge which allows me share and educate clients in any financial decision making process.

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