Should I switch mortgage lenders ?

Question

Hey so I am in the process of purchasing my first home it is new construction. I decided to get some upgrades on the property that I already paid out of pocket. The lender is now telling me that “ You can’t pay for selections out of pocket to keep the sales price lower than what you are actually paying for the home to be completed”.  With that said they would like to add the price of my upgrades to the sales price of the home.   Ultimately dose t this hurt me as a buyer do you guys think I should look for another lender?

Mark Herbert · Answer

@Xavier Mc holder - that's a good question and the short answer is that it depends on your state's law. I see you are from NY but not sure if you are building there? Texas is a non-disclosure state; this means that the sales price is not a matter of public record and therefore the taxing authority must come up with their own value. The sales price is reflective of what the property is worth. If you have upgrades, it should be worth more.....up to a point. If you pay $20,000 in upgrades and then the builder/seller doesn't add that to the total price, then there is no way for them to account for those upgrades. If they get audited, they have to be able to prove what they sold. It's like going to McDonald's and getting a Big Mac meal and telling them you want it super sized and then asking them to charge you for a regular size. You tell them to ring you up at the lower cost and will pay them the difference separately. As a company, they have to keep track of all of their transactions. Poor analogy because the numbers and transaction is totally different but I hope that makes the point.

Bob Okenwa · Answer

@Xavier Mc holder

When they sell new homes, builders are looking to keep the sales price high. Selling a property at a higher price not only means they’ll earn a profit, but they will also have established a baseline for their other properties. Which means they can justify selling their similar new builds at the same price point or higher.

Yes your property taxes will be higher. I built my home a few years ago and the process was the same in terms of upgrades being added to the total price of the home.

Xavier Mc holder · Answer

@Mark Herbert thanks for the breakdown but doesn’t the huger sales price have an effect on the property tax ? Also why if a buyer can pay in full for the upgrades what is the benefit of getting it tacked on to the sales price ?

Mark Herbert · Answer

Hi @Xavier Mc holder, I think I can help you here; I am a former mortgage lender and have experience with new construction. I don' think this reason warrants a change in lenders, especially if that lender is affiliated with that particular builder but I will chime in. Here's what I think your lender is saying - any upgrades that you purchase will be part of the cost of the property. It does not discount the total cost of the house and materials. I don't know where this house is that you are buying so the numbers maybe unrealistic but think of it like this; you have a house site + the plan + upgrades = the price of the house. Adding materials that you pay for out of pocket does not change that equation. This direction should actually be coming from the builder/seller not the lender but as the case is, the equation is the same.

Here's an example: Lot $50,000 + House plan $250,000 + upgrades $25,000. The seller/builder often will give you a "cap" in upgrades and may tell you something like 'any upgrades beyond $X (let's say you have to pay for anything above $15,000) will come out of your pocket'. So you have paid the deposit + $10,000 in upgrades in this scenario. You have a total sales price of $325,000 and you now have your initial deposit + $10,000 with the builder. Your final contract will be amended to show all of the upgrades which will also be noted on the appraisal. When you go to closing, the deposit you made initially (let's say $2,000) + the upgrades deposit ($10,000) means you will get credit at closing for the $12,000 you have on deposit that goes towards closing costs, a lower loan amount, discount points or any combination you choose. You aren't losing any dollars here - you are getting the full value of a house you ultimately will be paying for and credit towards closing for dollars already spent.

Last thing I will say here is to be careful about the amount and number of upgrades you choose to do because not all upgrades increase the value of your property. I've seen people spend way above what was recommended on a build to find out that their home didn't appraise for the total sales price. Upgrade limits builders impose are there for a reason, they want you to know that if you put dollars beyond level "x", that risk now falls back on you, Mr. Customer. If your appraisal comes in lower than full sales price, in this example say by $5,000 and appraises for $320,000 - guess where $5,000 of your $12,000 is going to go? That's right, you will be making up that difference, not the builder. Remember, the lender will give you a loan for the lesser of the sales price or appraised value. I hope this helps you!