With a surge in fresh construction surging through the market, homebuyers today might catch a lucky break: builders are hustling to fill the void left by scarce resale inventory. In August 2023, brand-new houses accounted for 16.42% of all U.S. home sales—a 3.28% climb compared to the year before, highlighting an upward trend in new builds.
What Exactly Is Home Builder Financing?
When we talk about home builder financing, we’re referring to mortgages arranged through the very folks who build the house or their affiliated lenders. Big players like Toll Brothers have their own lending arms—Toll Brothers Mortgage Company, for instance—while others lean on “preferred lenders,” banks or mortgage outfits they’ve partnered with over time.
While this setup can be a win-win, it’s crucial that lenders play by the rules to dodge conflicts of interest and stay compliant. Generally, qualifying for a loan through a builder’s preferred lender mirrors the process you’d face elsewhere: expect to choose from various loan types, often including conventional mortgages that might come with steeper criteria and fees. Typically, a 20% down payment and a credit score around 680 are the benchmarks, though specifics can differ.
Builder Financing Incentives: Sweetening the Deal
To charm buyers into using their financing, builders regularly roll out tempting perks. “Almost every new development these days features some kind of incentive,” remarks Patty Zuzek, a Minnesota-based real estate pro deeply involved with Fieldstone Family Homes.
Snapshot from August 2023: Over half—55%—of builders dangled incentives to spur sales, up from 43% the year prior, per the National Association of Home Builders. Around one in four builders slashed prices by an average of 6%, making the market extra competitive.
Popular Perks
- Upgraded home features (think swanky appliances or premium finishes)
- Discounts or credits towards your lot purchase
- Temporary mortgage rate buydowns
The Lowdown on Mortgage Rate Buydowns
The current climate of high interest rates has builders flexing with rate buydowns—temporary interest rate cuts paid upfront by the builder, lender, or buyer to ease early payments.
The 2/1 buydown is a fan favorite: knocking off 2% in the first year and 1% the second before resetting to the standard rate. So, a 7.25% mortgage effectively becomes 5.25% initially and then 6.25%, smoothing out the bite of rising costs.
Zuzek points out that snagging one often means sticking with the builder’s preferred lender and title company, since those parties typically handle the upfront buydown fees. Eligibility depends on your creditworthiness and mortgage type.
Heads up: When rates reset, borrowers can face sticker shock as these loans often climb beyond standard fixed rates. Jeff Lazerson, president of Mortgage Grader in Laguna Niguel, cautions that buydowns usually end up costing more in the long haul—but they can be a clever play amid rising rates, especially if the builder or lender foots the bill initially.
Perks Beyond Financing: Home Upgrades
One standout advantage of opting for builder financing? The ability to roll home improvements right into your mortgage. Whether it’s luxe kitchen gadgets or specialty flooring, financing these extras through the builder often means bagging lower costs on materials and labor—thanks to their bulk deals—and negotiating better terms.
While an independent lender might offer a cheaper mortgage, you’d typically need to cover upgrades out of pocket or tap into a separate home improvement loan.
And remember, a finished home sitting idle racks up taxes, maintenance bills, and lost selling opportunities for builders. So both builder and lender are motivated to keep the process smooth and snappy, offering you potential advantages like expedited closings or special offers.
The Flip Side: Drawbacks of Builder Loans
1. Higher Interest Rates and Extra Fees
Picking a builder’s preferred lender can come with a premium price tag. Lazerson explains, “Splitting profits between the mortgage company, builder, and loan officer means the loan is often marked up, translating to steeper interest rates and additional fees once any buydown ends.”
Beware of “free” upgrades too—they often come with inflated values baked into your loan. In Lazerson’s experience, deals through builders rarely undercut what mortgage brokers can offer independently.
2. Tighter Qualification Criteria
Some financing deals expect higher credit scores and heftier down payments. Take Pulte’s advertised 5.69% APR deal: it demands a 780+ credit score and a hefty 20% down payment on a $500,000 home—meaning a $100,000 upfront chunk. By comparison, the national median down payment in early 2023 hovered around $24,100, making this a steep hurdle for many.
3. Restricted Options
Discounts and benefits often tie you to the builder’s inventory and chosen lenders, which can limit your geographic or home-style preferences. Some incentives only apply to existing homes within specific communities, curbing flexibility if you’re eyeing something different.
Should You Take the Builder Financing Plunge?
Keep in mind: no builder can force you into their lending arms—it’s just one route among many. Asking sharp, pointed questions about timelines, fees, and fine print is a must, says Zuzek.
The convenience factor is undeniable—akin to snagging a car loan right on the dealership floor—but evidence shows mortgage shoppers consistently save by casting a wider net. Aim to gather quotes from at least three different lenders to get a balanced view.
Only then can you weigh whether the builder’s sweetened loan offer—with all its bells and whistles—is truly the smartest way to bankroll your new digs.