The practice of home builders steering lenders refers to the common industry practice of recommending or ” steering” homebuyers toward using a specific lender for their mortgage needs. This practice is often seen in real estate transactions where builders have established relationships with preferred lenders.
The introduction of preferred lenders by builders raises questions about potential benefits and drawbacks for homebuyers, as well as considerations regarding transparency and consumer choice in the mortgage process.
In this article, we will discuss and cover Home Builders Steering Lenders Mortgage Guidelines.
The Practice Of Home Builders Steering Lenders
Most home buyers approach a mortgage lender before shopping for a new home. The mortgage loan originator will then help the buyer complete a 4-page mortgage loan application, run a credit check, review the credit scores and credit history, and review the buyer’s tax returns, W-2s for the past two years, and their most recent paycheck stubs.
The relationship between the home buyer and the loan officer begins with the mortgage pre-approval process. Once the loan officer is confident that the borrower is fully qualified and meets all mortgage lending guidelines and their company lender overlays, they will issue a solid pre-approval letter.
With a solid pre-approval letter, the home buyer can comfortably shop for a home. If the buyer sees a home they wish to purchase, they can enter into a real estate purchase contract.
It is essential that buyers feel comfortable with their loan officers because the mortgage process can be stressful, especially for borrowers with less-than-perfect credit or those with higher debt-to-income ratios. Almost all borrowers who have pre-approval from a loan officer will go through the mortgage process with that loan officer since a strong bond and relationship have already been established.
However, there are times when home buyers encounter a new construction development and decide to purchase a brand-new home from a home builder. In almost all cases, when home buyers want to purchase a new construction home, the builder will steer them to their preferred lender.
Why do Builders Want You to Use Their Lender?
Builders often recommend using their preferred lender for several reasons:
- Doing so can streamline the mortgage process due to the established relationship between the builder and lender, leading to quicker approvals and smoother communication.
- Using the builder’s lender may come with incentives such as closing cost assistance or upgrades, making the home purchase more appealing to buyers.
- Builders have more control over the financing process when buyers use their preferred lender, ensuring financing is secured on time for the sale’s completion.
- The builder’s preferred lender is often well-versed in the builder’s requirements and specifications, making the financing process more efficient and reducing potential issues.
- Developing a rapport with the lender favored by the builder may result in prospects for future business and recommendations for both parties, creating a mutually advantageous agreement.
Despite these benefits, buyers must compare offers from multiple lenders to ensure they obtain the most favorable terms and rates for their mortgage. Speak With Our Lenders for compare Mortgage offers
Can a Builder Force You to Use Their Lender?
No, sellers or builders cannot influence buyers to choose a specific lender or title company, according to RESPA (Real Estate Settlement Precedures Act). The act prohibits offering kickbacks, referral fees, or other incentives that could be perceived as coercion.
As a buyer, you can choose your lender and shop for the best mortgage terms and rates. Builders may encourage you to use their preferred lender by offering incentives or highlighting the benefits, but ultimately, the decision is yours. When considering mortgage options, it is recommended that you compare proposals from different lenders to obtain the most advantageous terms and rates.
Should I Use the Preferred Lender?
Deciding whether to use the builder’s preferred lender should be based on a thorough assessment of various factors. One consideration is the builder’s incentives, such as closing cost assistance or upgrades, which can add value to using their recommended lender.
Comparing these incentives against the rates, terms, and fees offered by other lenders is crucial to ensure a competitive deal that aligns with your financial goals.
Another aspect to consider is the experience and reputation of the builder’s preferred lender. Research their credentials, read reviews, and assess their customer service to determine if they are a reliable choice.
Additionally, evaluate the lender’s flexibility in meeting your specific needs and whether they are open to negotiating for better terms or discounts. It is recommended that you obtain quotes from multiple lenders, including the builder’s preferred lender, to make an informed decision based on the overall package, including rates, terms, incentives, and customer support.
Ultimately, the choice should be based on what best suits your financial situation and preferences.
Why Would a Seller Have a Preferred Lender?
Sellers, whether they are builders or real estate agents, often have preferred lenders for several practical reasons:
- Working with a preferred lender can streamline the home-buying process. These lenders are well-versed in the seller’s requirements and procedures, leading to smoother communication and quicker approvals.
- Preferred lenders may offer incentives to sellers, such as reduced fees or faster processing times, benefiting both the seller and the buyer by making the transaction more efficient and cost-effective.
- Sellers prefer working with trusted lenders to ensure financing is in place on time, maintain control over the process, and foster accountability.
- Building relationships with preferred lenders can lead to future business opportunities and referrals while ensuring consistency and quality service in the financing process across multiple transactions.
While sellers may recommend a preferred lender, buyers always retain the right to choose their lender. They should compare offers to secure the best terms and rates for their mortgage.
Is it Legal or Illegal for Home Builders to Steer Lenders?
Home builders may suggest lenders with the best loan terms, but home buyers should always be free to choose. It’s essential for borrowers to feel comfortable with their chosen lender, and trust and confidence in loan officers are crucial. This is especially important since borrowers must share sensitive financial information such as tax returns, W-2s, bank statements, paycheck stubs, and other documents like divorce decrees, bankruptcy paperwork, and child support or alimony documents.
Therefore, a trustworthy relationship between borrowers and their loan officers is necessary to protect confidential financial information.
Ways Of Home Builders Steering Lenders To Buyers
Most home buyers have already chosen a mortgage loan officer when shopping for new construction homes. However, some home builders may strongly encourage the home buyer to use their preferred lenders. In fact, some builders may even offer special incentives only if the home buyer chooses their preferred lender. However, these incentives are not offered if the home buyer decides to go with a lender of their choice. Click here to find a Lenders for your home
Is it Common for Home Builders to Incentivize Buyers?
It is common for home builders to offer closing cost credits, upgrades, and cash incentives to buyers to use their preferred lenders. However, if the buyer chooses a different lender, these incentives may not be available. This violates federal mortgage lending rules and can be a criminal matter.
While it may be difficult to fight against this practice, I always prioritize my borrower’s best interest and inform them of the potential time and cost involved in challenging the builder and the CFPB. The RESPA violations committed by home builders steering lenders to buyers are often not enforced due to understaffing at the Consumer Protection Financial Bureau.
Home Builders Steering Lenders To Home Buyers: Criminal?
Purchasing a new construction home has several advantages. Everything in the home is brand new, from the foundation to the roof, windows, flooring, millwork, kitchen, bathrooms, siding, walls, fixtures, and appliances. One disadvantage is the need for more mature landscaping. Nevertheless, owning a new home can be highly fulfilling.
However, it is becoming increasingly problematic that many home builders steer lenders to home buyers. This forces the home buyer to choose the home builder’s preferred mortgage lender to receive the incentives the home builder offers its home buyers.
Changing Lenders To Builder’s Preferred Lender
Home buyers often work with their lenders for months and receive pre-approval. Although they have a strong relationship with their original loan officer, they may switch to the home builder’s preferred mortgage lender due to the incentives offered.
Home builders steering lenders to new construction home buyers is illegal. It violates every aspect of RESPA and can be considered mortgage fraud. In one case, a borrower I pre-approved opted for the home builder’s preferred mortgage lender.
Builders Steering Buyers To Their Preferred Lender
Here’s a situation in which the buyer was informed that failing to choose the preferred mortgage would render the real estate purchase contract null and void, and the home builder would keep the earnest money deposit. The borrower contacted the Consumer Financial Protection Bureau (CFPB) seeking assistance but was informed they could not intervene.
The CFPB advised her to review the real estate purchase contract and abide by its contents. Upon careful examination of the contract, the buyer discovered that the builder had the right to withdraw the seller’s concessions of $5,000 to cover the home buyer’s closing costs.
Furthermore, the contract stipulated that the builder would charge a $500 daily penalty if the home buyer failed to close the deal by February 25th, 2024, should they choose a lender other than the preferred one. However, if the buyer opted for the home builder’s preferred lender, the builder would grant an extension and waive the $500 daily penalty.
Builders Are Worse Than Slimy Used Car Salesman
In this case, the borrower had no option but to work with the home builder’s preferred lender. She wanted to avoid a legal dispute and did not want to risk losing her earnest money deposit.
Unfortunately, things worsened when the loan officer from the preferred lender pocket called her. During this call, the area manager and the loan processor made derogatory comments about the borrower. Despite these unfortunate circumstances, the borrower had to continue working with the preferred lender to close the deal on her new home, as her family had already notified their landlord that they would be moving out of their rental.
This practice of forcing borrowers to work with preferred lenders is unacceptable. Nobody should have to go through what this borrower is currently experiencing. I will provide updates on this situation in future blog posts.
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!!!!!
If you have any questions about Home Builders Steering Lenders Mortgage Guidelines or you who need to qualify for loans with a lender with no overlays on government or conforming loans, please contact us at Gustan Cho Associates at 800-900-8569. Text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. Tal to Our expert for compare Mortgage loans
FAQ: Home Builders Steering Lenders Mortgage Guidelines
What is the practice of home builders steering lenders? The practice of home builders steering lenders refers to the common industry practice of recommending or “steering” homebuyers toward using a specific lender for their mortgage needs. This practice is often seen in real estate transactions where builders have established relationships with preferred lenders.
Why do builders want you to use their lender? Builders often recommend using their preferred lender for several reasons:
- Streamlined process and quicker approvals.
- Assistance with closing costs or offering upgrades as incentives.
- Control over the financing process and meeting deadlines.
- Familiarity with the builder’s requirements and specifications.
- Potential for future business opportunities and referrals.
Can a builder force you to use their lender? No, builders cannot force you to use their preferred lender. According to RESPA (Real Estate Settlement Procedures Act), buyers have the right to choose their lender, and coercion or incentives that limit this choice are prohibited.
Should I use the preferred lender recommended by the builder? The decision to use the builder’s preferred lender should be based on a thorough assessment of various factors, including incentives, rates, terms, lender’s reputation, and flexibility. To get the best terms and rates for your mortgage, it is recommended that you compare offers from multiple lenders. This will allow you to decide which lender is the most suitable for your needs.
Why would a seller have a preferred lender? Sellers, including builders or real estate agents, prefer lenders because of their streamlined processes, incentives, control over financing, relationship building, consistency, and quality assurance.
Is it legal for home builders to steer lenders to buyers? While it’s common for builders to recommend lenders, coercion or limiting buyer’s choice is illegal. Buyers should be free to choose their lenders based on their best interests and terms.
What are some ways home builders steer lenders to buyers? Builders may offer incentives or discounts only if buyers use their preferred lender. Still, this practice can violate federal mortgage lending rules and RESPA regulations.
What should I do if a builder insists on using their preferred lender? Buyers should review contracts carefully, seek legal advice, and prioritize their best interests when choosing a lender. Communication with the builder and lender is essential to address concerns or issues.
This blog about Home Builders Steering Lenders Mortgage Guidelines was updated on April 4th, 2024.
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.
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.
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.
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
The builder is offering a kickback to their preferred lender. Most preferred lenders have lender overlays.
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.
Unfortunately, builders steering their homebuyers to their preferred lenders is done all the time even though it is totally illegal.
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!
What state are you in? Please reach out to us at gcho@gustancho.com or call us at 262-716-8151. Text us for a faster response.
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.