Less popular option in tough times.
Many homebuyers think that the only source of mortgage lending is banks and mortgage brokers. True enough, the property market regards home builder lending as the third choice of the different types of lenders in the country today. Internet lending is fourth because of its relatively new introduction to the public.
Home builder loans (HBL) are geared towards homeowners who prefer to pay their mortgage after the property is completely built. This works by having the home builder bear the construction costs first. The builder will give you a construction line which allows the lender to release funds every time a portion of the house is completed. The money is paid to the contractor after the lender’s inspector approves of the construction. When the house is finished, the owner will pay the construction line using a mortgage. The lender can select which type of mortgage: 15- or 3-year fixed, an adjustable rate mortgage or an unconventional type.
In short, the HBL eliminates the hassles of financing and construction or for some, the entire ownership process.
Difference with Traditional Lenders
Unlike banks, there are very few home builders who will grant you a lowered mortgage rate. That’s because it pays for them to find lenders that offer more expensive options. HBLs have a reputation of being pushed forcibly into borrower decisions. Since home builders maintain a network of lenders and benefit from higher fees, they have no incentive to recommend a source with a lower rate. If homebuyers accept their offer, they are missing out on the more competitive cost that the bank or a mortgage broker can offer them.
Because of this, there are not too many lenders that specialize in HBLs. Aside from lower demand; this source is usually involved in controversies, which discourage more borrowers from contacting builders for their loan needs. Some builders threaten to add more fees to the owner’s long-term costs if they do not shop with their affiliated lender. Incentives should be offered (upgrading a patio, walkway, etc.) for an owner to take a mortgage from the builder’s partnered lender.
However, there are advantages. HBLs are more suitable for construction that needs immediate financing but can only be paid by the owner in due time. If the home builder is a trusted and prudent professional, you can have more confidence that the rate you’re getting is a reasonable one.