Home Builders Steering Lenders

Home Builders Steering Lenders Mortgage Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On Home Builders Steering Lenders Mortgage Guidelines Was PUBLISHED On May 4th, 2020

The Practice Of Home Builders Steering Lenders

Most home buyers go to a mortgage lender prior to shopping for a new home.

  • The mortgage loan originator will complete a 4-page mortgage loan application, run credit, review the credit scores and credit history, review 2 years tax returns, two years W-2s, and most recent paycheck stubs
  • The relationship between home buyer and loan officer starts with the mortgage pre-approval process
  • Once the loan officer feels confident borrower is fully qualified and meets all of the mortgage lending guidelines as well as their company lender overlays a solid pre-approval letter will be issued
  • Armed with a solid pre-approval letter, the home buyer can now shop for a home
  • If buyer sees a home they want to purchase, they can enter into a real estate purchase contract
  • It is very important buyers feel very comfortable with their loan officers
  • This is because the mortgage process can be a stressful process
  • This holds true especially for borrowers with less than perfect credit or borrowers with higher debt to income ratios
  • Almost all borrowers who have a pre-approval from loan officer will go through the whole mortgage process with the loan officer that issued the pre-approval letter since a strong bond and relationship has already been established
  • However, there are cases where home buyers run into a new construction development
  • Buyer may decide to purchase a brand new construction home by a home builder
  • In almost all the cases when home buyers want to purchase a new construction home the home builder will steer the home buyer to their preferred lender

In this article, we will discuss and cover Home Builders Steering Lenders Mortgage Guidelines.

Is Home Builders Steering Lenders Legal Or Illegal?

Nothing is wrong for home builders steering lenders for the home buyer to get the best terms on their home loan.

  • It is every consumer’s right to shop for a lender of their choice
  • Homebuyers need to feel comfortable with the lender they choose
  • Borrowers need to trust their loan officers
  • Borrowers need to have faith and confidence with their loan officers

This is because they are providing the most private financial information to their loan officers such as the following:

  • tax returns
  • W-2s, paycheck stubs
  • bank statements
  • divorce decree if applicable
  • bankruptcy paperwork if applicable
  • child support and alimony paperwork if applicable
  • other private sensitive financial information

Ways Of Home Builders Steering Lenders To Buyers

Most home buyers who are shopping for new construction homes already decided on a mortgage loan officer to use:

  • However, many home builders will really force the home buyer to go to their preferred lenders
  • Many home builders steering lenders will go as far as offering special incentives if and only if they go with the home builder’s preferred lender

Builders will not offer the incentive if the home buyer goes with the lender of buyers choice.

Incentives Offered By Builders Steering Buyers Buyers To Their Preferred Lender

Examples of incentives home builders steering lenders are the following:

  • closing cost credits
  • appliance upgrades
  • other upgrades
  • cash incentives if the home buyer goes with the home lender that the home builder steers the home buyer to

If the home buyer does not go with the home builder’s preferred lender, then the closing cost credits and builder upgrades will not be available.

  • This practice is so common with home builders and is a total violation of federal mortgage lending rules and often times is a criminal matter
  • I run into situations like these all the time
  • Although illegal, I act on my borrower’s best interest and tell them that it will take time and money to try to fight the practices of the home builder and the CFPB

Consumer Protection Financial Bureau, often is understaffed to be enforcing the RESPA violations that is being committed by home builders steering lenders to home buyers.

Home Builders Steering Lenders To Home Buyers: Criminal?

There are many advantages in buying a new construction home .

  • Everything is brand new
  • From the foundation, to roof, windows, flooring, millwork, kitchen, bathrooms, siding, walls, fixtures, and appliances
  • Negatives includes landscaping such as not being able to enjoy mature trees and shrubs
  • However, homeownership of a new construction home can be extremely rewarding
  • Unfortunately, most home builders steering lenders to home buyers is becoming more and more of a problem

The home buyer is literally forced to go with the home builder’s preferred mortgage lender in order to get the incentives that the home builder gives its home buyers.

Changing Lenders To Builder’s Preferred Lender

There are many times where the home buyer has worked for months with their lender who issued them a pre-approval:

  • Buyer has already had a strong relationship going but due to the incentives the home builder offers, they need to cut ties with their original loan officer and go with the home builder’s preferred mortgage lender
  • This act of home builders steering lenders to new construction home buyers is against the law
  • Violates every aspect of RESPA and many times fall under mortgage fraud
  • There is one case where a borrower who I pre-approved went with a home builder’s preferred mortgage lender
  • The preferred lender was so sloppy and borderline incompetent where the home borrower decided to transfer their loan from the builder’s preferred lender to us
  • The home buyer requested to the preferred lender that the FHA case number be transferred to us

The borrower then gets a call by the home builder the same day.

Builders Steering Buyers To Their Preferred Lender

Why builders direct buyers to their preferred lender

The buyer is told that if she does not go with the preferred mortgage that the real estate purchase contract will be null and void and that the home builder will keep the earnest money deposit.

  • My borrower contacted the Consumer Financial Protection Bureau, CFPB, and told them about her situation
  • However, the CFPB told her that there is nothing they can do about it
  • She was told that she needed to read the real estate purchase contract and whatever it is in the real estate purchase contract is what she needs to go by
  • The home buyer thoroughly reviewed the real estate purchase contract and the contract states that the builder has a right to withdraw the sellers concessions of $5,000 to cover the home buyers closing costs
  • It stated that the builder will add a $500 per day penalty if the home buyer does not close by the 25th of February, 2018 if the home buyers go with another lender besides the preferred lender

If the home buyer stays with the home builder’s preferred lender, then the home builder will grant an extension and the $500 per day penalty will be waived.

Builders Are Worse Than Slimy Used Car Salesman

All in all, my borrower had no choice but to stay with the home builder’s preferred lender

  • This was because she did not want to get tied up with a drawn-out legal battle
  • She did not want to have her earnest money deposit at risk
  • To make a bad situation worse, my borrower got a pocket call from the loan officer of the preferred lender and the loan officer
  • The area manager and the loan processor was talking about my borrower on how crazy she was and other derogatory comments and discussions
  • My borrower still had no choice but to work with the preferred lender of the builder
  • This was because she needed to close on her home
  • Her family already gave her landlord notice that they will be moving out of their rental
  • This is a criminal practice in my opinion
  • Nobody should be going through what my borrower is currently going through now
  • I will keep you updated on the outcome of this situation in later blogs

We will be covering more blogs about home builders steering lenders to home buyers and will have others who have experienced these types of behavior by home builders write about their experiences. Stay tuned!!!!!

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10 Comments

  1. Mike, thank you for the blog post. I am a lender in SC and appreciate the frustrations with builders and inside lenders. I would like to know how this worked out for you client.

  2. Hello Mike, I am always running into this situation as well in my Market. The builders are unbelievable sleazy and there doesn’t seem to be much we can do about it. The CFPB seems to only want to go after the really big fish and won’t go after these smaller builder lender relationships. Anyway, please let us know how it worked out.

  3. In my experience as an LO with CTX Mortgage (which, ironically started as a financing arm of Centex Homes), some non-Centex builders pushed for kickbacks from us when we tried to lend to their buyers. Las Vegas was especially bad; we had to pull out because it was so corrupt there.

  4. I have a situation right now where the Builders preferred lender is not offering a CalHFA loan and my borrower needs this product to qualify and the Builder’s RE agent is stating that the only way the borrower can get the incentive is to use their Lender. I know this is not legal snd a violation of RESPA but where can I get a brief explanation from CFPB that details why this is a violation. Thx

    1. The builder is offering a kickback to their preferred lender. Most preferred lenders have lender overlays.

  5. I run into this situation all the time in Murfreesboro TN. Many of the builders either own or are owned by a mortgage lender. They will even make the buyer sign an amendment to the contract that states how much money the buyer is losing by not going with their preferred lender. I have filed complaints with the CFPB a few times and they have simply ignored it. I wonder if they would ignore it if loan officers started offering incentives to realtors for promoting us to their clients as it is the same thing. Or if a loan officer said they would pay $1,000 of the buyer’s closing costs if the buyer uses the loan officer. I doubt they would simply ignore the violation if it were a loan officer or mortgage company doing it.

    1. Unfortunately, builders steering their homebuyers to their preferred lenders is done all the time even though it is totally illegal.

  6. Going through this right now. The building is offering $7,000 toward closing cost if I use their lender and that lender is quoting a rate .325 % higher than other brokers (the market rate). Another lender, that I trust, says he could give me back $6,500 at the rate quoted by the builders lender. Not much real incentive. If I kept the loan for 15 years if will cost me about $12,000.

    Where can I find the specific law that makes it illegal for a builder to offer incentives to use a specific lender? I just need a little leverage!

  7. The bottom line…”How do we get builders to stop this tactic…and how do we force them to incentive regardless of which lender the buyer(s) chooses?
    CFPB nor HUD (RESPA) has the guts or care to enforce the rule.

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