If There Are Any Special Business Relationships Between the Builder and Other Businesses, You Need to Know About Them Before You Go Any Further.
Builders, just like people in any other business, can have special relationships with other companies. Often the businesses they have these relationships with include mortgage companies. Some of the bigger national builders own their own mortgage operations, while others work with local companies. Whatever the case, it is a legal requirement that any special business relationships that have been established must be disclosed to you.
Why is this important to you? If a builder is referring you to third parties, don't you want to know if she's just doing it out of the kindness of her heart or if she's getting a piece of the action?
If a title insurance policy costs you $1,000 and the builder encourages you to use a particular title company, wouldn't it be helpful to you to know that the builder gets 10 percent of whatever the title agency sells?
Often these arrangements are called controlled business arrangements, or CBAs. Or they may be called affiliated business arrangements, or ABAs. Whatever the arrangement and whatever it's called, there's a law saying that you must know about any special deals and sign a piece of paper acknowledging that fact.
If you're encouraged to use a particular title company, a particular attorney, a particular mortgage company, or anyone else, you're supposed to know how "special" those special relationships really are.
Your Contract Could Spell Disaster.
Perhaps the most critical element of buying new is how your contract is worded. You can get yourself into some very hot water if you're not careful. The builder wants you to have an enjoyable experience, but the builder is also out to make money. You buy a house you like from the builder; he gets money from you.
The contract spells out what is expected of you and what the builder is expected to do. Perhaps the most important part of the contract concerns your mortgage and where you can get it from.
If a builder owns a mortgage company or has an ABA with a mortgage operation, it's likely that you will be required to complete a loan application with that mortgage operation.
Your contract won't require you to take a loan from that mortgage firm, but you will most often be required to apply nonetheless.
This is the tricky part—be careful about how this section is worded. If all the contract says is, "As part of this agreement, you, the buyer, will apply for a mortgage from my mortgage company within five days," you're fine. You're not required to use the builder's mortgage company; you merely must apply.
But it can get confusing fast. The contract can also say, "As part of this agreement, you, the buyer, will apply for a mortgage from my mortgage company within five days. If we get you an approved loan and you do not use our mortgage company for your home loan, you will lose your deposit of $50,000."
I recently received an e-mail from a buyer in the Washington, D.C., area who was in a real pickle. He was buying a new home, but he couldn't sell his old one in time. He needed the money from the old home to put down on his new one. But the old house wasn't moving—there was absolutely no traffic.
It came down to 10 days before closing, and the builder wanted the mortgage information. After all, as part of the contract, the buyer was required to apply at the builder's mortgage company, and if the builder's mortgage company offered him a loan and he didn't take it, he would lose all $65,000 of his deposit money.
The buyer didn't use the builder's mortgage company, but instead found one on his own. But because he hadn't sold his own home, his debt ratios were too high for him to be approved by anyone. In fact, his debt ratios were nearly 100. He had to be qualified using both house payments, and when added together, they almost equaled his monthly gross income.
That meant that after taxes, he was automatically "upside down" with his payments. He simply couldn't afford the new home, so he withdrew his offer.
"Not so fast," said the builder. "Our contract says that if we offered you a loan, then you would take it or else lose your $65,000." The builder had in fact offered the buyer a home loan, one that used no income documentation whatsoever and had a sky-high interest rate.
Put both house payments together, and his ratios hit 125.
"But I can't afford those payments!" said the buyer.
"Sorry, the contract says nothing about that," said the builder. "Move in, or lose $65,000."
Had the buyer used a Realtor to help negotiate his contract, this probably would not have happened because the Realtor would have changed the wording. The contract should have been changed to read, "If the builder's mortgage company offers you a mortgage with an interest rate of 7.00 percent or below and you have sold your old home and you don't take the loan, you'll lose your $65,000."
Now it's a little fairer. Now the builder is convinced that this is a serious buyer, and the buyer knows that this is serious business. Now he needs to go get financing to close the deal, and he's obligated to use the builder's company as long as its rates are below 7.00 percent and he's sold his home.