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.
San Antonio, TX”
— BEN POPKEN