Monday, June 26, 2006

Mortgage 101: Preferred lenders and builder's incentives

We've seen it a million times (and when I say WE, I mean me). Maybe you have seen it. A builder of a new home subdivision, condo building, or new condo conversion offers incentives somehow based on the preferred lender. "If you use our in-house lender when buying our condos, we'll throw in a spice rack and matching pot holders for free!".

This may be an overt promotion, or some guy sidles up to you at an open house suggesting you use ACME Lenders. Yes, the same ACME Lenders from the Roadrunner Cartoons. But their rates turn out to be higher... so you don't want to use their lender and you lose the spice rack and the potholders... and you are sad.

Kenneth Harney's latest cloumn explains the difference between "tie-in" incentives (those incentives offered by a builder only if you use a preferred lender), and regular incentives... which are just fine. Tie in incentives are illegal when they prevent competition.

The preferred lender needs to be defined as well here for clarity. These chaps are okay too. They have struck a deal with the developer and/or brokerage to sit at the open houses and offer you special rates. Sometimes the preferred lender does not have anything particulary special, but just has a solid working relationship with the brokerage- and first crack at those consumers walking through the door.

There is nothing wrong with using a preferred lender for a particular development. Just shop around. The rate isn't everthing either people... you need to make sure the broker/lender is competent... what's their track record? But if things check out okay, the preferred lender can sometimes offer awesome deals, such as $3000 towards your closing costs.

How? One example is a recent new condo conversion at the 4600 block of South Drexel in North Kenwood. There is a TON of action in this area just outside of the historic Kenwood Mansion District and Hyde Park, home of University of Chicago (or Chicago, as they were trying to be called... like Princeton and Harvard and... Cher, Madonna... Yanni. You get the picture).
The developer paid very little for the building itself and is charging better than very little for the condo units. So, they have a little leverage to bring on a preferred lender, who may offer $3000 towards your closing costs. They may be cutting each other deals to better market the property, and you benefit from the competetive incentives.

Note, however, the builder is not offering upgrades only if you use the lender... so make sure when you see one of these "deals", that the builders incentives are separate from the lender's incentives.

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