Did you know that there is a Federal Housing Commissioner? Me neither. Nevertheless he is there inside the beltway, ostensibly looking to balance the needs of the housing market and the options available to consumers - would-be home buyers. Recently, Commissioner Brian Montgomery had this piece of advice about first time home buyer incentives when a developer dangles glittery incentives in front of you trying to entice a home purchase, you can always say no. And often, you are not walking away from a particularly good deal.
Even though recent home sales prices have flattened, the inventory of unsold homes has climbed to a level not seen in nearly fifteen years. Developers who have borrowed in order to get their new homes built can't afford to hold inventory, and many have resorted to some fairly glamorous incentives. These include upgraded kitchens, cars, and a number of financial incentives such as making the first six mortgage payments. Often these are first time home buyer incentives, designed to reel in the people who are less able to compute the real cost. The kicker with most of the financial incentives - such as reduced closing costs - is that you are required to use the developer's mortgage provider.
Commissioner Montgomery comments, "Often these (first time home buyer incentives cause) consumers feel compelled to use a builder's hand-picked mortgage company because they feel they've been offered an incentive they can't refuse." But federal real estate settlement rules "require that these incentives be legitimate and not built into the price of the house or the cost of the loan."
Controlling the terms of the mortgage gives the developer the ability to recoup the costs of those incentives by building them into the loan. Recent home sale prices don't necessarily act as a deterrent to an excited buyer closing in on a purchase. Too often, builders will threaten to revoke the incentives offers if the potential buyer seeks out other financing. The Commissioner's comment was prompted by reports of consumers feeling compelled to accept this in-house financing, even though there is a better loan available elsewhere.
One of the ways that developers provide this compelling influence is by taking deposits of $10,000 or more on the home while details are being worked out. A consumer who chooses to seek outside financing can be in danger of losing the deposit, regardless of what escrow law has to say about initial deposits. These first time home buyer incentives can cause new buyers to feel trapped.
In one case an Arizona builder took an $11,000 deposit and a signed contract from a buyer who found that the builder was providing a loan that was a percentage point higher than what was available from mortgager brokers in the area, where recent home sales prices have cause intense competition in the loan business. When the buyer opted for the outside financing, the developer kept the deposit, tore up the contract and stated that the home would be sold to someone else. The Commissioner's office intervened and the buyer got the deposit reinstated, the home and an additional $3,800 contribution from the developer.
In a Tennessee case, the builder offered cash and a loan package as an incentive for a first time home buyer that was accepted. As escrow progressed, the builder's mortgage company informed the buyer that her credit score - a near 700 FICO rating - would only qualify her for a high interest loan, instead of the mortgage originally promised. That's bait-and-switch, pure and simple.
Officials see antitrust and unfair trade practices involved in these maneuvers. Builders manipulate buyers who are in an anticipatory and emotional state; they want to believe in the incentives and they don't want to lose the house. The buyer becomes a captive of the builder and his marketing staff, not stopping to think that recent home sales prices put the buyer in the driver's seat.
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