There’s an old saying; “There’s no such thing as a free lunch.” And although millions of students who get free school lunches might argue, those aren’t free either.

As a lender, I frequently get asked if I can meet a builder’s lender’s incentives. Which, to be clear, are incentives the builder is giving to use their preferred lender. Things like upgraded countertops, free basement, lot upgrades, etc… but none of these are free. I’ll get back to this in a few paragraphs.

How about down payment assistance (sometimes referred to by the initials DPA). These are programs, often government-supported or sponsored, that give a portion of the loan amount as a down payment. Some of these are paid back in the future but at zero percent interest. Hey, isn’t zero percent interest-free? No. Some decrease in the balance due over time, usually 36 months, and when that clock hits zero the down payment assistance no longer has to be paid back. Isn’t that free money? No.

OK, my lender promised me $500, $1,000 or more in lender credits, aren’t those free? No.

Nothing is free.

Builders and lenders often play a shell game with costs, purchase price, loan amounts, and upgrades. It’s very common, that the builder will raise the purchase price of the home by the exact amount of their tremendous incentives. Here’s a real-world example I saw. The borrower was purchasing a home for $529,000. The initial contract was for $529,000. The buyer added $30,000 in upgrades, granite countertops, better appliances, etc… bringing the actual purchase price to $559,000. The builder offered $15,000 in discounts and incentives to use their lender. The borrower was specifically told they would not be charged any points, prepaid interest, on their awesome rate. At closing the borrower had to pay $5,590 in points, 1%, and they were informed their purchase price had to be raised to $574,000. So, the borrower not only didn’t get ANY discounts or incentives, they ended up paying $15,000 more for the home plus $5,590 in points for a total swing of $35,590 more than they should have. There were no incentives. The builder just made more. Those $30,000 in free money incentives ended up costing the buyers a total of $35,590. Which, in my book, is money not well spent.

How about the down payment assistance programs. Those are completely free money. They aren’t. Most of them require a 1% origination fee just for doing the program. If you use the previous numbers, just because they are valid home expense numbers, if the borrower had used down payment assistance there would have been an additional $5,740 origination fee. Additionally, virtually all down payment assistance programs, have higher interest rates. Sometimes only slightly, but sometimes tremendously. It depends on the program.

Now, I’m not talking smack about DPA. These are great programs that can get people who otherwise can afford a home but don’t have enough for a down payment to become homeowners. I’m just saying the money isn’t free and there are costs associated with these programs. If it is possible to not use ‘free’ money you should. It’s almost always in the borrower’s best interest to do things on their own.

Finally, lender credits. These are free right? Well, no. Just because the borrower doesn’t see the expense, the lender often does. Often these credits come out of your personal lender’s commission. Sometimes they are branch concessions and sometimes they are company concessions. Regardless someone has to pay for your free money.

My advice is to get all the costs, fees, and information associated with your mortgage and find a personal lender you can trust! Someone who is transparent and honest.