If you have recently made the decision to buy an under construction or newly built home, then you will want to make sure that your homebuilder allows you to get the lowest possible rate on a new home loan. The difference between half a percentage point in your interest rate can mean thousands of dollars that you save, or have to pay extra, over the lifetime of a thirty year loan. Becoming educated on your mortgage broker options, understanding lender fees, and creating a strong position in which to negotiate are the key elements to reducing your interest rate.

Why a New Construction Mortgage is Different

Most people are familiar with the general process of buying a home and working with a Realtor. Usually, their Realtor will make suggestions on mortgage companies that have treated their clients well in the past, or the buyers will already have a working relationship at a bank that offers home loans. The loan process on new home construction is different because regional and national homebuilders package their lowest prices with the requirement to use their preferred lenders. This doesn’t occur for someone who is buying an older home, or working with a small custom builder.

As an example, if you visited a new neighborhood that is being built by Lennar, Beazer, or other large new construction builder you will see signs and banners advertising incentives like “Free Stainless Steel Kitchen Appliance Upgrades,” “All Closing Costs Paid Plus $10,000 in Upgrades,” or “Interest Rates As Low AS 3.5%.” When you inquire further on the details of these buyer’s incentives, they will be tied to using the company’s in-house lender, or a specific mortgage company that has a business relationship with the builder.

Now you are faced with a dilemma, as the incentives can be very helpful towards making the home more affordable, but the builder’s personal lender may not give you the best interest rate on your home loan.  That upfront discount could, in fact, cost you more over the long term.

3 Types of Mortgage Brokers to Use

To ensure you get a new construction home loan with a low interest rate you need to get quotes from the builder’s lender, your banks loan specialist, and an independent mortgage broker with whom your friends or Realtor has had several successful home closings. Each of these individuals needs to give you a mortgage quote based on the same specifications for your personal buying situation. An example would be a $200,000 fixed rate loan with 0 points and 10% down. This is essential because each mortgage quote will be outlined differently, and having the same starting point will make it easier to compare numbers.

The lenders will also need a detailed understanding of your assets and liabilities, as well as permission to pull your credit score. Do not hold back on any of this information, otherwise the quotes are not worth the paper on which they are printed.

How to Negotiate Your Interest Rate

Now it’s time to compare numbers and put yourself in a place to negotiate your home loan. First off, it is important to know that you will often have conflicting numbers on your closing costs concerning taxes, HOA dues, and other non-negotiable items. These are costs the lender has no control over, but they will vary on your quotes because the outside mortgage brokers won’t have the precise information on hand for the county and neighborhood in which you are making your purchase. For this reason, you should use the builder’s preferred lender’s numbers, as they will have closed many homes in the neighborhood and have more accurate figures.

These non-negotiable items should not be confused with the loan origination and other lender fees, which are always negotiable. Your Realtor can help you decipher between the two, and your first step is to ask the other mortgage brokers to match the lender with the lowest lending fees.

Now that you have similar lending fees and correct closing costs, you need to give the other mortgage brokers a copy of your lowest interest rate quote, and ask them if they can match it. At this point, one lender will be standing out as the best. If it is the homebuilder’s lender, then you need to pay the $250-$350 loan application fee, submit the application to the lender’s underwriting department, and lock the rate as soon as you are given official approval.

If your best mortgage quote is from an outside lender, then you have an extra step. You must submit the loan applications to both the outside mortgage broker and the builder’s lender. While you will have the added expense of paying two application fees, this will ensure that you are truly approved for the interest rates you were previously offered and put you on solid ground to negotiate with your builder. None of the pre-approval numbers before the application are locked in stone until you have submitted all the papers, paid your fees, and been given loan approval subject to appraisal only. Many lenders have promised the sky, only to drastically change their numbers once the final approval is completed.

Now that you can show full approval, lower interest rates, and lower lender fees from the outside lender you can go back to your builder in a strong position and tell them to put pressure on their lender to match the rates or allow you to use your personal mortgage broker and retain the incentives they originally offered with the home. You can add further pressure on the builder by timing your closing near the end of that company’s fiscal year. Larger homebuilder’s will often sacrifice profit margins to make end of the year closing numbers, which adds to your ability to negotiate lower interest rates and prices.

While this process takes several phone calls and careful planning, the time you spend upfront to ensure you get a low interest rate on your new home loan can save you thousands of dollars over the years of your mortgage.

No, but beware! Traditional loans are going to continue to require more money down and FICO scores of 700-750 plus. In these recent and continuing times of economic chaos, how many people have not had some sort of "ding" on their credit? Jobs and pensions have been lost. Stock portfolios have been devastated. At least forty six million Americans are uninsured. Medical costs have bankrupted people or put them into "collections"......even some of those who actually do have insurance. While luxuries are being eliminated from our lives, gas, energy, and grocery costs are rising. If you haven't fallen victim to one of the catastrophes mentioned above, then perhaps some other equally bad or unavoidable situations have trashed your credit rating.

So what options are out there for those wanting to buy a home? There are some options, but it depends on exactly how bad your credit actually is. Lenders will tell you to repair your credit rating before you buy. That is sound advice, but it will not help you NOW. Right now, with full documentation, there are some great loans through FHA. Some require only 3-5% down payments. You would need to talk to a Lender who specializes in FHA to find out if they have a loan that would work for you. FHA is typically looking for steady income and a FICO score of around 550, depending on your area. If you are a Senior Citizen of 62 years of age or older, then you are really in luck. FHA insures a government backed program that is a type of reverse mortgage called a HEMC, which stands for home equity mortgage conversion. This can be used to get equity out of your current home that you don't "qualify" to refinance or get a second mortgage on. Even better, if you are 62 or older, have no home, but you do have cash, EVEN IF YOU HAVE NO INCOME AND BAD CREDIT, you can BUY a home through this program so long as you have the required downpayment. It is a complex program and not for everyone, but if you don't have any other choices it can be a lifesaver. Absolutely do not deal with any reverse mortgage lenders who are not HUD approved.

There is also always some Seller Financing out there, probably more now than ever before. They don't WANT to finance those with bad credit, but with enough cash down and a higher interest rate you might have a chance. A letter to the Sellers submitted with a purchase contract explaining "how" your credit got "bad" can often help. If it's You or Nobody, they might choose you.

Finally, there are "hard money lenders". Consider them the Loan Sharks of Mortgage Lending. With a BIG downpayment, they may graciously grant you a mortgage at an interest rate of somewhere between 18-26%. plus or minus and 3-5 discount points or more. If this is your only option, RUN quickly and rent until your situation changes.