Should you borrow from your builder?

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These days, it seems everyone wants to get into the mortgage business.

Builders are offering loans through internal mortgage divisions. Real estate chains are referring customers to affiliated lenders. And with banks petitioning the government to let them sell real estate, the lines between home building, buying and financing have blurred like never before.

But while this “convergence” makes borrowing more convenient, consumers should remember that the most convenient lender isn’t necessarily the best. People who don’t compare what builders or agents are offering with what’s available from outside sources are just like car buyers who don’t scrutinize dealer-financing offers. Both can end up paying too much.

“It’s typical cross-selling. It’s smart business. If you have one customer that wants to buy a house, that customer is going to need a mortgage. If you already have that customer in hand and you can provide two products for that customer — a house and a mortgage — that’s two pieces of business,” says Henry Savage, a Washington Times guest columnist and Virginia lender.

But as a customer, “You can burn yourself easily if you don’t know what you’re doing and you don’t know the mortgage business.”

Companies that sell things and then finance the purchase have been around for years. Department stores offer instant credit to jewelry buyers. Car dealers offer loans to shoppers in their showrooms. And home builders have been offering mortgages to home buyers for more than two decades.

Ryland Group Inc. out of Calabasas, Calif., for one, has operated Ryland Mortgage since 1978. The home builder says its mortgage division handles financing for almost three-fourths of the people who buy its homes in 21 markets in 15 states.

“It’s about making it more convenient for your customer,” says Ryland spokeswoman Pam Krebs. “We want them to buy the house and we’re going to do everything we can to make the process easier.”

One-stop shopping on the rise
Because of recent initiatives, like those at Cendant Corp., even more mortgage shoppers face the buy here/pay here choice.

Cendant franchises the Coldwell Banker, Century 21 and ERA real estate brokerage brands. It began offering home buyers the option of obtaining loans from its Cendant Mortgage division about five years ago.

Customers who visit ERA agents looking for homes are now offered the chance to get prequalified for a loan through the ERA Mortgage Web site. Cendant Mortgage actually handles the processing, approval and closing of the loan, though customers may never hear the Cendant name because the mortgage company operates under the brand name of whatever real estate division referred the customer to it.

“Cendant Mortgage’s business model is to provide mortgage services to our business partners on a private-label basis,” says Bob Andwood, senior vice president of sales and account management at the Mount Laurel, N.J.,-based mortgage company.

“Because we’re both part of the same family, it made perfect sense to deliver those services to those branch offices,” he adds. “It’s a very logical fit.”

Conventional loans from affiliated lenders, in theory, are the same as loans from anyone else. Mortgage banks, lenders and brokers ultimately get most of their mortgage money from the secondary market, so loan rates, points and fees shouldn’t vary all that much.

— Updated: April 17, 2002

But affiliated lenders say people benefit from financing through them because such lenders have an added incentive to qualify and close loans as quickly as possible. After all, home sales and real estate commissions depend on it.

“Century 21 Mortgage is working a lot harder for Century 21 than maybe other lenders might work,” Andwood says. “That’s not to say that a loan decision isn’t a loan decision, but I think that brand equity certainly adds value and the customer appreciates knowing that everyone is pulling on the same set of oars to make the closing date and the closing process as easily as possible.”

You’d better shop around
But consumers have to be careful. Builders can have tricks up their sleeves just like any other lender.

In an April 2001 National Mortgage News story, a Department of Housing and Urban Development enforcement official was quoted as saying the agency was looking into whether some builders were illegally penalizing home buyers who didn’t use their affiliated mortgage companies. While builders can offer incentives to buyers to get them to use their lender affiliates, they can’t penalize them for not doing so.

For example, a customary, legal arrangement is for builders to offer customers a few thousand dollars they can apply toward closing costs and points charged by their affiliated lenders.

But in some cases, builder-affiliated lenders just charge more points or higher rates than outside competitors. The practice consumes much of a borrower’s “discount” and builders who do it are violating the Real Estate Settlement Procedures Act, according to a HUD spokesman.

Savage says he has seen this happen from time to time. A builder might offer, say, $5,000 in credits on a $200,000 mortgage. But the builder’s mortgage company might charge two points, or $4,000, to get a rate of 7.25 percent on a 30-year loan when outside companies are charging zero points for the same mortgage.

“This is not across the board,” says the president of Alexandria, Va.-based PMC Mortgage Corp. “But in more instances than one, the closing-cost credit is offset by higher points and higher rates. They’re not getting the great deal they think they are.”

Still, Ryland’s Krebs says her company offers customers competitive rates as well as other benefits — beyond the simple convenience of being able to apply for loans through the company’s sales offices.

For one thing, the mortgage company processes loans a bit more quickly because it doesn’t have to exchange data back and forth with outside third parties. For another, it provides borrowers with more frequent updates about the status of their loans between application and closing.

“It’s one-stop shopping for the home buyer,” she says. “It makes everything a little easier for them.”

And as long as convenience doesn’t come with too dear a price tag, experts say there’s nothing wrong with choosing the in-house financing company.

“The reality is Century 21 Mortgage is one of several options that an agent might refer a customer to. They have other local lenders they might use too and there’s no exclusivity there,” says Cendant’s Andwood. “We compete along with everyone else.”

— Updated: April 17, 2002