New Home Buyer Beware

What to look out for when buying a new home: predatory lenders, kickbacks to title insurance companies and super-fun undisclosed terms.

A cautionary tale, in the form of a reader letter, inside…


M. Maldonado writes:

    “My husband and I recently tried buying a new home (brand new, still being built) from a company called Medallion in San Antonio, TX. We put down a $1000 earnest money in accordance with the sales agreement and then set out trying to secure a loan for the home. We were unable to secure the loan (again, the sales agreement called for an “unconditional” letter of commitment) and believed that the wording of the sales agreement called for Medallion to return our earnest money. They didn’t. They cited “direct costs” incurred by them, however when I inquired as to what these “direct costs” were, all communication from them ceased.

    The home was a “spec” home. That means a “speculation” home. Builders build these when developing areas in order to keep workers busy, so to speak. We could make no changes to this home as “everything had already been ordered” according to the sales person. This home was going to be built whether we were going to buy it or not.

    Let it be noted that this builder works with a “preferred lender” as most new home builders do. They offer packages of incentives, sometimes into the tens of thousands of dollars worth, to try and get people into new homes. Most often they work with subprime customers, that is, those whose credit would not be good enough otherwise for them to secure a loan of that size. So, as you can imagine, they say things like, “no money down” or “zero closing costs” and then gouge them with high interest rates.

    Medallion’s preferred lender is Well’s Fargo. We did not like their customer service or loan offer (80% at 7%/20% at 9% for 100% financing. My husband and I have excellent credit but are cash poor. We did not have the ready cash for the down payment at closing.). We decided to shop around. Medallion did not like this and tried to convince us not to choose another lender. They also did not like that we did not want to work with their title company and even went so far as to say that we couldn’t use another title company, their company policy did not permit it. I called the Texas Department of Insurance, and they told me that a builder could not force a buyer to use a particular title company. It turned out that Medallion gets some kind of kickback for every customer that uses their preferred title company, Marathon Title.

    We found a new lender, but their offer was contingent upon us selling our current home. Fine. We needed to do that anyway. They also told us, however, that to grant us a loan with our current home mortgage still outstanding would be irresponsible on their part. It would have tipped our debt-to-income ratio to the debt side and put us possibly in a foreclosure situation if we were unable to make our payments. Wells Fargo had never said anything like this to us. They were just willing to give us the loan.

    Now, we may have lost our $1000, but, if it’s at all possible that the word could get out about these predatory practices of new home builders and their ways, I would be most pleased. We asked questions. I think that saved us from getting in over our heads. Unfortunately, I think most people are just so excited about getting into a new home that they don’t question, they don’t challenge, they don’t know their rights. And they pay for it, sometimes dearly.

    Thanks for looking out for the consumer. I wish more people did.

    M. Maldonado,
    San Antonio, TX”

— BEN POPKEN

Comments

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  1. Sudonum says:

    As someone who has bought, sold and built new homes and dealt with many banks. title companies, lawyers, etc. I can vouch for alot of what she says. In just about every state I’ve every done business in the buyer gets to choose the closing/title agent since they are paying the closing costs. And yes most LARGE new home builders will try to steer you to their title company since they usually DO get something on the back end.
    As to the rates that Wells Fargo is charging, they do not seem out of line for someone who is looking for 100% financing. The writer does not state whether she has the usually required “reserves” in some kind of savings or money market account. Most lending institutions will not loan at their best rates unless you have a 3-6 months worth of house payments in “reserve”.
    The writer states that they currently own a home. Has she tried her current lender? Usually they are also a lot more understanding about selling your existing home and in some cases offer a product known as the “contingency loan” where your new loan doesn’t kick in until you sell your old house. And yes, it will cost you a few points. One last thing, the average “best” rate from most banks for a 30yr fixed loan last week was 6.11%. In November it was around 6.5% So once again, 7/9% is not a bad rate. She is lucky they didn’t also ask for mortgage insurance.
    Not all new home builders are predatory, stay away from the large sub-divisions. Look for a smaller sub-division where several builders may each be building 5-10 spec homes in your price range. You’ll find some of the smaller builders easier to deal with.
    And as a builder I have also been screwed by buyers and the title companies they employee.

  2. Sudonum says:

    Oh, and NOBODY builds a spec home “to keep the workers busy”. They build it because they think they’ll sell it, hopefully for a profit of around 10%. Then they can pay the note on their truck, their Workers Comp and builders risk insurance and maybe if they can do that a few times a year they can make a decent living.

  3. danger says:

    Our first house was a spec home and I would never buy a brand new construction again. There are just too many things we wish we could have done differently or upgraded. Interesting that the builder said no changes could be made to the house, since that’s where they make alot of their money (charging for extra cable drops, outlets, lighting fixtures, upgraded appliances, etc etc). I would much MUCH rather buy an existing home next time.

  4. Trai_Dep says:

    Justed wanted to comment that that was one of the most well-written user-submitted pieces I’ve seen. Potentially complicated issue that she laid out nicely. Nicely done!

  5. billhelm says:

    There is significantly more risk to a lender on 100 percent financing and they charge accordingly.

    Also, highly doubtful that wells would give you another mortgage while your existing one is still outstanding, particularly becaus you are doing 100 percent financing. They should have explained that to you, unfortunate that they didn’t.

    Also, 7 is not the greatest rate for prime, but if they had lumped into subprime, likley the rate on the first would be more around 9 or 10 and the second even higher. Likely it’s 7 because of the 100 percent financing.

  6. Mayor McRib says:

    I didn’t think that the mortgage rates being offered by Wells were that bad at all. Sudonum they wouldn’t ask for PMI (mortage insurance) because the 80-20 loan covers that intial 20% equity to pay it off. Spec homes are going to pushed heavy right now because they want to get rid of them before the end of the year before taxes will have to be paid on them. If I was M. Maldonado I would worry about selliing the current residence first and use some of that equity combined with good credit to get even more favorable terms.
    I do have one question though? What does it matter what title company you use, aren’t they all pretty much the same and it’s just a matter of submitting and signing the forms?

  7. Sudonum says:

    McRib, Title charges vary greatly by title company. Especially once they start nickel and diming you with courier fees, copy fees, etc. I have also had title companies charges for title insurance vary greatly for houses in the same price range in the same sub-division. Both houses are new construction so there is no difference in the number of titles that they have to go though and verify. The first time I got taken on this was buying a condo in the FLA panhandle and I went with the real estate companies title company. A friend also bought a unit in the same development but used a different title company and saved around $1500. If I am the buyer I will NEVER use the sellers title company. I have shopped around and saved some money doing it every time.

    I just bought a lot to build on and used a different title company on a friends recommendation. Simple closing, a cash deal. I did not want title insurance as I knew the developer well. The title company still charged me $300 for a title search even though they weren’t issuing a policy. I screamed bloody murder, but it did no good.

    I also started thinking about Ms. Mal’s current home and no mention of any equity in it after I posted. That struck me as a little strange.

  8. Terrelowens says:

    I agree with trai_dep, kudos on a well written, well thought out, concise letter.

    I wonder why they didn’t consider a 100% loan with PMI insurance? We were able to purchase our home that way and then, thanks to the hot housing market, we were able to refinance our loan so that we only had an 80% loan (based on equity) and lost the PMI. Our payment actually went down by a few dollars.

    Also, as of the new year the PMI will be deductible from your income taxes on new loans and refinances that are for the same amount or less than the original loan. So, while PMI is not always a great option, it can work for some and, in fact, may be a benefit at times.

    I have shopped our loan both times we have taken out a mortgage and, often by playing the lenders against each other, we have had pretty good success.

    I wouldn’t give up on that $1,000 either. I would read your agreement carefully and if you feel that they owe that money back to you I would fight for it!!