I recently had a closing with a client who bought a beautiful new home from D.R. Horton in a rural area, just outside of Austin. D.R. Horton prides themselves on being a one-stop shop that caters to first-time homebuyers. This has been one of the keys to D.R. Horton’s success as a national home builder: offer incentives to the buyer if they use their in-house title company and their in-house lender. If the buyer chooses to use their lender and title company, D.R. Horton currently offers significant incentives. When used in conjunction with the USDA loan program, a home buyer can buy a home for practically zero money out of pocket.
Are Incentives a Good Idea as a Builder?
Sure, for several reasons. The builder gets to control the entire process of the transaction. They know if an issue arises with the lender, they can handle it because it is their internal person handling the loan. Same with title issues. And, due to current tax laws for corporations and their subsidiaries, companies like D.R. Horton can take advantage of significant tax incentives that far outweigh the discount they offer to buyers. And they can use these incentives as a marketing tool to attract more sales. It’s a win-win-win for builders.
Are Incentives a Good Idea as a Buyer?
“No money down and no closing costs to buy a brand new home? I’ll take two, thanks!” While it’s true that in certain neighborhoods that qualify for the USDA Loan Program, you can buy a home for no money down, there are some important things that the buyer should research and be aware of before they steal the pen and scribble on the dotted line.
Research the Neighborhood Comps and Don’t Overpay
Be sure you aren’t overpaying for those incentives. Have your Realtor check comps in the area and the neighboring areas to make sure you are paying a fair price relative to recent solds.
The 2% Funding Fee For USDA Loans
USDA Loans offer 100% financing for buyers that qualify for the program, and for select rural neighborhoods that qualify (although there is talk that the USDA loan program will begin phasing out certain Austin neighborhoods soon.) Buyers should be aware of this 2% fee, even though it is rolled into the loan. In essence, the buyer is paying 2% more for the house than the purchase price, and it is added into the amortization table over 30 years.
Compare Their Lender’s Note Rate to Outside Lenders
The old adage “What the big print giveth, the small print taketh away” could apply here. Up-front incentives are great, as long as they don’t cost you more over the long-term. Be sure to do the long math to make sure that it still pays to use the builder’s lender. Mortgage calculators are available for free. Use them!
Regardless of Incentives, Calculate Your Financial Picture
Everyone considering a purchase of a home, both brand new or resale, should sit down and take a close look at their finances. Prepare a budget, and truly be aware of how much home you can afford. If you get stumped, contact a financial advisor who can assist you.
If everything looks great, then and only then you are prepared to pull the trigger and become Austin’s next home owner!