Comparing apples to apples with builder closing costs incentives
Compare apples to apples.
It is not uncommon when you are buying new construction home that a builder may offer a closing cost incentive. Typically they will require you to use their in-house lender or a list of approved lending partners. The incentive may come directly from the builder, the lender, or a combination of both. This is an attractive option and can help reduce what you have to bring to closing and may appear to reduce costs associated with the loan. However, there is no free money, and it is important to fully understand the details of the offer and to make sure that it is truly better than what you could secure with an outside lender.
Builders may prefer using their own lender(s) partially because it gives them confidence that the home buyer's loan will close since they know the entity providing the financing. If they have their own lending affiliate, they profit from the transaction.
The details should outline the dollar amount they will cover and what can be covered, as this has to be applied to allowable closing costs/settlement charges. The verbiage is also important because it may state that they will cover "up to" a specific dollar amount. You will want to be careful if this is the case in making sure that you can apply the full amount based on what your anticipated settlement charges are. If there is a surplus, you cannot receive this back as cash at closing. However, there may be other ways to address this, such as a principal curtailment to the loan or if there are costs such as inspections or a survey related to the purchase that can be applied. Sometimes the builder will cover attorney fees if you use their preferred attorney, regardless of whether you use their lender.
What is most important for you to know is that the lender cannot bump your interest rate up to cover the cost of the incentive. If they say they are offering $2,000 in lender-paid closing costs, they must be able to offer you that with their closest to PAR interest rate (closest to PAR means the rate closest to zero points charged). If the builder is the one paying the credit, they cover this cost, but it may be in their overall cost structure. In this case, the lender should still, in good faith, offer you the closest to PAR rate as well as the options for paying points or receiving a lender credit.
The advantage to a home buyer with the builder-paid closing cost incentive is that it can limit your out-of-pocket funds due at closing. For a buyer that may be tight on funds, this could be important. You should also know that an outside lender could provide you the option of a higher interest rate with a lender credit to be applied to closing costs. This is still worth considering because if an outside lender can provide you with a lower interest rate than the builder's lending partner by giving you a lender credit that at least covers the builder incentive, then you should be receiving a better option.
Ex) Builder's Lender - 3.875% with $2,000 in closing cost incentive
Outside Lender - 3.75% with $2,000 lender credit applied to closing costs
⇒ Lower Rate covering the same amount in closing costs!!!
