No. While the builder can require that you be qualified by his preferred lender, you are free to borrow from whomever you please.
The builder said that he had gone to great trouble getting his houses approved by the Federal Housing Administration. And that I would be foolish if I did not take advantage of the favorable terms available on FHA loans from his associated lender. Is he right?
Maybe, maybe not, depending on whether you need an FHA-insured loan to buy the house.
Builders targeting moderate-income home-buyers often find it useful to have their homes approved by FHA. FHA eligibility expands their market to include potential buyers who can't make much of a down payment and don't have good credit. If you are one of those, go with FHA.
But if you can put 5 percent or more down or have good credit, you have no reason to pay the higher mortgage insurance premiums on an FHA. Shop for a conventional mortgage.
Even if you do need an FHA, you need not take it from the builder's preferred lender. The interest rates and points on FHA mortgages are set by the market, not by the government. To protect yourself you need to check the preferred lender's quotes against those available from other sources.
My builder says I can get a loan anywhere, but strongly advises using his preferred lender who has agreed to provide below-market prices to the builder's customers. Is this on the level?
Quite possibly. Marketing expenses are very high in this market, and a lender who is offered an assured block of loans by a builder can afford to shave the price.
However, there can be no assurance that the price break extends across all mortgage programs and market niches - in fact, I would be surprised if it did. Once again, prudence demands you check price quotes against other sources.
I have contracted to purchase a new home for $210,000 from a large builder. The builder has offered me a $10,000 credit toward mortgage settlement costs and appliances if I take my loan from his preferred lender. I'm suspicious of this kind of arrangement and want to be free to shop for the best deal on a mortgage...Is it likely that I can find a mortgage from another lender that will be worth $10,000 more than the mortgage I get from the builder's lender?
No. But that doesn't mean you accept without argument whatever the preferred lender offers.
Builders cannot require buyers to use preferred lenders, but they can make this a condition for obtaining concessions. Builders will do this when they have a financial interest in the lender. Large builders especially are likely to have affiliated lenders.
Since the builder will include the concession in the price of the house, once you agree to the price you are going to find it difficult not to deal with the preferred lender. The lender can charge you an above-market rate or points, but with the concession you will still be better off than if you financed elsewhere.
Suppose the builder pads the sale price by $5,000, but offers a concession of $5,000 if you use the preferred lender. The lender can price the loan, say, $3,000 above the market. If you take the loan, you are ahead by $2,000, relative to turning it down. But you are out $3,000 compared to what you would have had to pay if the builder had no preferred lender and didn't pad the sale price.
The only way a buyer can avoid this trap is to refuse deals that tie concessions to use of a preferred lender. Offer the builder the ask price less the concession.
