You're in the glitzy model home at Camelot Estates, your face dripping with sweat because you've just signed a sales contract for the largest purchase of your life. That's when the builder pulls out a gilt-edged business card and says you can get your best mortgage deal from his lender.
This fictitious scenario is not uncommon. Many tract builders have sweetheart arrangements with lenders to provide mortgage money for buyers of their new homes. Some of these tie-ins may work to a buyer's advantage and others don't, mortgage specialists caution.
"You should never assume that you're going to get the best possible deal with your builder's lender. It's like anything else in life. Your Uncle Tim may not be able to get you the best deal on a car, either, just because he works at the dealership," says Paul Havemann, a vice president of HSH Associates, a mortgage reporting service.
Has your builder promised his XYZ Lending Co. Inc. will give you better-than-market terms on a mortgage loan? Then consider his claims carefully, says John Lloyd, Lutherville branch manager for Sears Mortgage Corp.
"My advice would be to check out what the builder is offering and then call the competition and compare what they have to offer," Mr. Lloyd recommends.
Here are pointers on financing your purchase of a new tract home:
* Remember: You have a perfect right to pursue your own new-home financing deal.
Federal law makes it clear a homebuyer is free to select his own mortgage lender and also makes it illegal for a builder to take a kickback for referring mortgage business to a particular firm, notes Brian Chappelle, who heads government affairs for the Mortgage Bankers Association in Washington.
Still, your builder may have perfectly legitimate reasons for trying to steer you in the direction of his favorite lender. Remember, the builder's overarching interest is in selling the homes in his tract as quickly and easily as possible.
"The builder wants to close those loans as soon as possible to keep his cash flow," Mr. Chappelle notes.
A builder may favor the XYZ lender on the basis that XYZ offers efficient and dependable loan processing for his buyers. He may also favor XYZ because he's worked out a deal in which his buyers get better-than-market terms, or a long-term interest rate lock, if he swings a certain amount of business in the lender's direction.
In rare instances, a homebuilding company may even own its own lending firm -- meaning it could benefit directly from your mortgage business.
* Find out whether your builder has obtained prearranged financing for the buyers in his tract.
"You can probably get a somewhat better deal through a builder who has already negotiated a deal with a lender," says Michael Sumichrast, a Rockville-based consultant to the homebuilding industry.
To entice homebuyers into buying units in his tract, the builder may arrange a special lending package for buyers through a lender who is guaranteed a large block of business from the builder.
Such "bulk commitments," as they're known in the field, can involve reduced closing costs, lower-than-market interest rates, or a protracted "lock" on your mortgage rate until the house is completed and the loan closes.
Sometimes, builders can obtain such favorable financing terms for their buyers simply by guaranteeing the lender that a number of loans will come his way. But other times -- particularly when a lender locks mortgage rates over a long period of time -- the builder must pay for that "forward commitment," Mr. Lloyd points out.
If the builder is reaching into his pocket to get a favorable financing package for his buyers, you can usually assume his costs will be passed on to the homebuyer in the sticker price on the home. Just like the extra fireplace you buy as an option, you're going to pay for the financing package.
"There is no free lunch in financing a new home," Mr. Lloyd stresses.
* Realize that your builder's lender may be your best bet if you are self-employed.
It's no secret that self-employed people have a tougher time getting a mortgage than do those who work for others. Lenders get nervous when they can't verify a borrower's income through W-2s.
But if a self-employed person buying a new home works with his builder's lender, the lender will be more motivated to help him consummate the deal -- presuming the borrower's credit is good. That's because the lender will want to preserve his relationship with the builder, who represents repeat business. And the builder doesn't want the prospective buyer to "fall out" during the lending process.
* Resist your builder's pressure to take his lender if you can find a better deal elsewhere.
Even if it means taking a day or two off work to do so, it's worth the time to find and compare alternatives to your builder's financing package, mortgage specialists recommend.
One good source of lenders' names is a real estate agent with whom you have worked in the past. Should you chose to use a lender referred by a real estate agent, you can anticipate better treatment than if you come without a referral. This is because the agent, like the builder, represents the prospect of repeat business for the lender.
Lenders are too busy these days with mortgage refinancings to give extraordinary service to the loan applicant who comes in on his own, says Mr. Sumichrast, who was formerly chief economist for the National Association of Homebuilders.
"If you go into the bank cold, they're not going to be terribly excited about your coming in," he says.
(Ellen James Martin is a columnist for The Sun.)