How the Heck do Homebuilders Have Those New Lower Rates?

I’ve seen them.  You’ve seen them.  Driving up and down Interstate 5, or maybe on Highway 26 – do these new construction communities have access to a secret pile of money that they can loan out at rates that are a full 2% less than what other lenders have access to?  And even if they do, why would they?

There is a billboard right by my house, right off 185th Ave here in Portland from a national home builder offering a rate a 4.75% for their new construction community down the highway in North Plains, OR.  They want you to perceive that only they have access to those rates, because most definitely your mortgage lender hasn’t presented you with those rates. Plus, you see the headlines - rates are hovering for most folks in the high 6%’s right now.  So, what in the eerie interest rates is going on here?

Well, the explanation is in size 8 font, about 30 feet in the air – in the legal disclosures that not even binoculars can read from your car (please don’t binocular and drive at the same time) at the bottom of that billboard.

So do these other national homebuilders realllllllllllllllllly have access to these rates?  Yes.  Of course they do.  They’d get in trouble otherwise.  However,  I do likely as well, and so do many lenders out there.

As I’ve told my clients ever since I’ve gotten into this business – obviously its important to talk rates with your lender – but equally and sometimes more importantly so, you have to talk about the cost to access those rates (what are you paying for that specific rate?).  I promise – you don’t need the nerd goggles to follow along here.

If you were a home buyer – and your budget was $600,000 - $650,000 and you were considering making an offer on 5 different homes – what is the tie breaker?  From a marketing standpoint, the builder comes in and potentially presents you with a 4.75% rate AND a $30,000 seller credit – done deal, right?  Sign me up!

Wait huh? I haven’t even negotiated – and they just introduced a $30,000 seller credit?  Are they more desperate than a nerdy mathematician with a pocket protector and tape wrapped glasses trying to solve for X in a room full of common coefficients only containing Y?

Perhaps, but it’s not until you get the Loan Estimate that you are likely to see the unraveling of this amazing card trick.  On page 2 of your Loan Estimate (legally required to be issued inside of 3 days after filling out their loan application), you might see that you are being charged $30,000 from this homebuilder’s “preferred” lender to buy down the rate.

Their $30,000 seller credit that they gave you is applied to the rate fee (you may have heard the term “paying points”).  Net/net it ends up being a wash in cost to you – perceptually nothing lost and an extremely low rate gained.  But does it make sense to follow this logic?  More on that in a sec...

First though, are ALL homebuilders employing this pricing/rate/credit/tactic?

I can’t climb up to read that fine print on that electronic billboard either, but I do have real life case studies of something similar happening to 2 different clients of mine, and a third just asked about this topic.  In one situation, the math worked for my clients, and I recommended they move forward with the homebuilder’s financing, the other the math didn’t work out at all – and we brokered the mortgage.

So why are New Homebuilders employing this tactic in the first place?

#1: To bring in additional foot traffic.

#2: To be the ‘tie breaker’ when you are looking at multiple homes.

#3: Build the perception of exclusivity.

and #4… and this is the biggie….they likely CANNOT give a price break (even in a soft market) on the price of their homes.

So now, let’s jump back to that previous example.  Instead of paying $602,900 for that North Plains home, you offer $30,000 below list price at $572,900 with NO seller credit (mathematically the builder nets the same profit). The homebuilder likely HAS to say "no" to this, because if they say “yes”, the home you just got a deal on – HAS to become a comp in appraisal reports in all homes in that community with similar floor plans for at least the next 12 months.  That means if they dropped the price on your home – they’ll likely have to drop the price on other homes – potentially even when the market heats back up again.  Plus, can you imagine the outrage of all the other folks that have already bought in the community if the builder started discounting on the same home/floor plan?

This seller credit is a genius way for the homebuilder to protect their prices.  Seller credits don’t get reported on comps on appraisal reports – and lenders are ok with them (to a degree, and the sized allowed is based on loan to value of the home).

What if you don’t want to use that $30,000 to buy the rate down?  Can you use it on other things?  That’s what I pointed out to my clients and in their eyes, the saleman at the Homebuilder failed to answer.  The answer is typically, yes.  The builder is separate (in most cases) from the lender – even if they share the same name. The builder generally doesn't care how you use the credit, they just want the house sold.

In my borrower’s case they wanted to use a portion of the seller credit to pay for closing costs (escrow and title fees, the new impound account, annual home insurance policy, pro-rated interest, etc).  So I showed them that they could get those costs covered by the Seller Credit and STILL buy the rate down (albeit not all the way to 4.75%).

The moral of the story:  Most lenders have access to the rates that you see on the billboard.  They likely aren’t exclusive to that builder.  Many times there might be a more advantageous way to utilize that seller credit than buying the rate down.  Since the builder isn’t likely to negotiate on price – do make sure to negotiation other “wins” for yourself.

Disclaimer:Because I talked about interest rates, I should probably also throw in some standard language here.  If I don’t have an active loan application for you – I can’t commit to any rate quote simply because I don’t know your situation.  Is that 4.75% that we see on that billboard available to everyone?  I have no clue – because I literally can’t read the fine print on that billboard either.  Are all homebuilders or even the home builder used in this example employing that tactic I talked about above?  I can’t be certain, again because I can’t read that fine print – but I’m happy to talk in person about my 2 specific case studies that I used as the premise for this article.  That said, it looks like national media is even starting to pick up on this:

These opinions are that of my own, and not that of our parent company C2 Financial.



* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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