What are the differences with regard to home loans when it is used to purchase a newly constructed home or a resale home?

Home loans made on newly constructed homes differ from home loans made on resale homes in a variety of ways. These include:

Closing costs– Closing costs for a newly constructed home are often slightly higher than for a comparably priced resale home. This is because often times newly constructed homes will have additional title insurance provisions (known as Early-Issue Title Insurance), homeowner’s association charges, and additional appraisal requirements that are not applicable for mortgages made on resale homes.

Prepaid Real Estate Taxes– The amount of estimated real estate taxes collected at closing for borrowers who choose to make their payments with their monthly mortgage payment can also vary drastically between lenders. Often times, lenders who are unaccustomed to providing home loans on newly constructed homes will collect an exorbitant amount even if the original disclosure documentation did not reflect that. Typically the preferred lender has worked with their underwriters to agree upon a more reasonable collection for taxes which is better for the home buyer.

Appraisal– Appraisal requirements are often more stringent for a newly constructed home that for a resale home. The preferred lender understands this and often works with a consistent group of appraisers who have experience evaluating new homes. The relationships and systems that the preferred lender has built will result in a less stressful closing.

Loan locks– Preferred lenders are typically more accustomed to managing interest rates over longer escrow periods than lenders who are accustomed to working on resale transactions which usually only have escrow periods of 30 days. Therefore, working with a preferred lender will often result in a better decision regarding your interest rate lock.

Why do some builders require mandatory application with the preferred lender?

It is very common for builders to require that a home buyer complete a mandatory application with their preferred lender as a part of the home buying process. Builders require this step so that they can be confident that buyers are being pre-approved by a reliable lender.

Any builder who has been around a while has certainly been “burnt” buy a home-buyer who was supposedly pre-approved. After accepting an offer to purchase a home the builder commits resources to customize a specific house for a specific home-buyer. If that buyer cannot perform on the purchase because of mortgage qualifying issues the builder is left with a home with custom features that may not be as valuable to other buyers. As a result, they get stuck with a loss.

Therefore, builders have put into place a mandatory application with a reliable preferred lender to reduce the incidence of this occurring.

Why should I use the preferred lender when buying a newly constructed home?

Often times the builder or seller will offer incentives for using their preferred lender in exchange for the assurance that the mortgage process will be completed in a professional and reliable manner.

These incentives can be both monetary and non-monetary. Monetary incentives can include a credit towards closing costs, a credit for free upgrades, an interest rate buy-down, or a combination of these items.

The non-monetary benefits of using a preferred lender can be equally as valuable. The non-monetary benefits of working with the preferred lender include expert advice that can only come from experience, seamless communication between parties during the transaction, and full disclosure of all upfront settlement fees/ charges.