You should use your homebuilder’s preferred lender if you can get a better deal with them — incentives included — than with other lenders. The better deal may not be obvious: While the builder may offer incentives for you to choose their preferred lender, the lender itself may charge you higher interest rates and fees. It’s best to shop around to find the best option for you.
A preferred lender is a mortgage company that partners with a residential builder. The lender could be a bank, credit union, online lender, or an in-house part of the builder’s company.
Here’s how customers, builders, and lenders can benefit from the preferred lender relationship:
→ Customers can enjoy financial advantages, such as closing cost assistance and design upgrades that could be worth 2% to 3% of the house’s value.
→ Builders are able to sell their houses more quickly, as their customers have immediate financing options.
→ Lenders get plenty of business referrals.
But preferred lender perks can come with strings for borrowers. The preferred lender may charge more for the loan, issuing a higher interest rate or imposing greater fees. So while it can be convenient to use the preferred lender, it’s best to do some mortgage rate shopping.
Builder lender vs. bank
Some builders offer in-house mortgage financing, while others refer you to their partner banks. You can always go with an outside lender if you find a better deal elsewhere. When comparing your builder’s preferred lender with other banks, look at the fees, rates, terms and incentives.
See our picks for the best mortgage lenders to get started today.
Do you have to use a preferred lender?
You don’t have to use a builder’s preferred lender. While builders can require you to apply for preapproval from their preferred lender, it’s illegal for them to require you to close on the house with their lender.
From a financial standpoint, a builder can’t “punish” you for choosing a different lender — they can’t increase the price of your house. They can, however, choose to reward or not reward you. If you pick the preferred lender, the builder may:
- Reduce the home price
- Cover some closing costs
- Install upgrades, including better appliances
If you go with an outside lender, you may not receive any of these rewards.
It’s also illegal for the lender to pay a builder for referrals. Builders can, however, still offer you incentives to choose their preferred lender.
Benefits of using a preferred lender
You’ll typically receive incentives. Many builders offer incentives, such as cash to cover closing costs or nicer home features, if you choose their preferred lender.
You may have a higher chance of approval. It benefits builders to partner with mortgage lenders that are more likely to approve buyers with different credit profiles.
You’ll enjoy convenience. The builder and lender already have a relationship and open channels of communication, which could translate to a smoother mortgage application and closing process.
You’ll have flexible timing. Preferred lenders can be required to give an offer relatively quickly — within two weeks. Plus, a builder’s preferred lender may offer a longer rate-lock period, up to 60 days or longer, to help account for any building delays.
Learn more about questions you should ask your mortgage lender.
Drawbacks of using a preferred lender
You’ll likely face higher interest rates and fees. As a preferred lender, the mortgage company may not face strong competitive pressure, leading to higher mortgage rates and fees for buyers.
Your loan options might be limited. A preferred lender might not offer certain mortgage products, including FHA loans and VA loans.
Your builder and lender may have conflicts of interest. With both parties set to earn a substantial profit from the deal, they may not always prioritize your best interests.
Should you use a preferred mortgage lender?
You shouldn’t automatically choose a lender because your builder recommends it. As with all financial decisions, it’s important to shop around and understand the mortgage requirements, fees and terms before signing on the dotted line.
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You’ll likely have a mortgage for 15 to 30 years, so you’ll want to choose a mortgage lender you can trust and rely on for the long term. Here are three steps to finding the right lender for you:
1. Shop around
Look up rates online, ask friends and family what companies they recommend, read reviews and apply with a few different lenders. Applying to multiple lenders won’t harm your credit score as long as you submit all your applications within two weeks.
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2. Compare offers
Look at the total value of each offer, including any incentives. Use a mortgage calculator to help you estimate monthly payments and other costs. You can also compare lender offers by filling out this worksheet from the Consumer Financial Protection Bureau (CFPB):
Source: CFPB
3. Negotiate and accept the offer
The best way to negotiate with a mortgage lender is to have loan estimates from other lenders in hand, according to the CFPB. If you receive a lower interest rate from one lender, show it to different lenders and ask them to match or beat it. Always look at the bottom line — the total loan costs. When you decide on a lender, notify the company of your intent to sign.
Learn more about how mortgage interest rates are determined.
