If you put down a good faith deposit on a new home and then are turned down for the loan, can you lose your good faith deposit?
When you decide to purchase a new home from a developer the home builder is very likely to encourage you to use their in-house lender. This encouragement might come from a “credit from the builder” to pay for upgrades, or in the form of a requirement that you be pre-approved for the purchase by their lender, which invariably will work very hard to take the deal in-house.
This has been a point of frustration in the mortgage industry for years. Consumer choice is a good thing, so if the benefits were real and consumers truly benefitted, the industry could not really complain. However, it is finally becoming clear that this arrangement is not for the benefit of the consumer. In particular, one national home builder reportedly failed to deliver loans as promised, and when the transactions fell apart kept $125 million in good-faith deposits.
We’ll get back to that story in a second. But first, let’s take a close look at the practice. Why would a developer care in the first place where you get your mortgage? The advantages include:
- They usually own the mortgage company and therefore profit from it.
- They have more control over the process for whatever purpose they want control.
- The lender is not likely to say or do anything that puts the transaction at risk, even if it means hiding information from you.
How do they convince you that using their lender is best for you?
- Certainty of close – these are “our guys” and they know the development. They’ve closed dozens of loans for us already.
- We’ll give you a credit towards upgrades if you use our lender.
- They have a “special deal” on rates and can get you the best rate possible.
Let’s deconstruct that for a moment.
Every journeyman mortgage advisor has closed “dozens of loans,” including many in new developments. That is what they do.
Every lender can offer you a credit to use as you please – closing costs, upgrades, etc. This is how lending works today. A good lender will also give you the option of not taking a credit and instead taking a lower interest rate, which often works out much better in the long run. If you finance the upgrades rather than pay for them with a credit, but save 0.500% on your interest rate over the entire loan amount, you will usually save tens of thousands of dollars over the time you think you’ll keep the house.
No one has a “special deal.” Lenders all get their money from the same pool, with the same number of folks involved who have to get paid. Sure, some lenders get too busy and raise their rates for a bit, while others get slow and drop theirs. That’s why any good broker worth his or her salt should be able to find you the best deal in the market on any given day.
So if the upside to using the developer’s lender is “all hat and no cattle” as they say in Texas, is there a downside?
It turns out there is.
Back to the story referenced at the beginning of this article: A developer that bills itself as “America’s Luxury Home Builder” is the subject of an investigative reporting piece. They have retained $125 million of customer’s good faith deposits over the last few years when the customer walked away from the transaction. This happened after they referred the customer to the developer’s mortgage company, and the customer was either declined or offered terms substantially different than those first offered.
This company has not been prosecuted to my knowledge by any regulator, nor have any of the principals or agents been charged with any crime. But the story is compelling, and worth five minutes of your time. You can find it here.
And if you or someone you know is in the market for a new home please follow the advice at the end of the article – have an attorney review any contract you sign before you commit to spending hundreds of thousands of dollars.