Builder Mortgage “Incentive” or Penalty?

Julie C. Nichols General

LinkedIn – Scott Drescher

The way a builder-referred mortgage company works is the builder sells you on using the in-house mortgage company by offering an “incentive” to use the preferred lender. They know that you are six months, give or take, from completion and you won’t lock the loan today for that long a period of time, so the preferred lender can say or price a loan any way that it wants, in order to look competitive, so buyers feel as if they are going to get a good rate when it’s time to lock many months from the time they sign the contract. The preferred lender proclaims nice platitudes such as “we don’t require you to use our preferred lender”, “you can choose anybody you like to do your loan”, “ours is very competitive with every other lender”, and “it’s just an incentive to use ours, so you’ll save a lot of money if you do”.

However, in practice it’s quite a different thing. We call this an “incentive penalty” because as soon as you sign the contract what was once an incentive to use the preferred lender magically transforms into a penalty for using anybody other than the preferred lender. For example, if the builder allots an incentive of $2,500 of your purchase price to pay toward your closing costs in exchange for using the preferred lender, it’s equivalent to being a penalty for using your own lender who offers a better rate, better personal service or higher efficiencies because it will cost you $2,500 to use somebody other than the builder’s preferred lender. This gives the preferred lender pricing flexibility to overcharge buyers by just a little bit less than the cost of the penalty, so if the preferred lender wants to overcharge by $2,000, you’re still stuck using them or face the penalty of the entire $2,500. The larger the incentive, the larger the amount of money the preferred lender can overcharge you.

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