Builder Incentives Explained: What They're Really Worth

A builder incentive is money or value the builder puts toward your purchase, like closing cost help, a rate buydown, a price reduction or design credits. They aren't equal. Judge each one by what it does to your cash to close and your monthly payment, and get it in writing.

What are builder incentives and how do they work?

A builder incentive is a contribution the builder makes to your purchase. It usually takes one of four forms:

• Closing cost help. A credit at closing that lowers the cash you bring.
• A rate buydown. Money paid up front to lower your mortgage rate, for a few years or for the life of the loan.
• A price reduction. A lower contract price.
• Design or option credits. Money toward upgrades or options in the home.

Builders use incentives because the base price is the number every buyer and appraiser sees. An incentive can move with the market without changing that number. That's normal across the industry. It isn't a trick, but it does mean you have to read the details.

Most incentives come with conditions. A common one is using the builder's affiliated or preferred lender, title company or closing attorney. Others depend on closing by a certain date or picking a home that's already under construction.

Are builder incentives worth it?

Often, yes. But only once you know exactly what you're getting and what it's tied to.

The same dollar amount can be worth very different things:

Ask your lender to run your numbers each way. A credit you can't fully use, or an upgrade you didn't want, is worth less than it sounds.

What is a $10,000 builder incentive?

It's $10,000 the builder agrees to contribute toward your purchase, but the label alone doesn't tell you where it goes. Ask these four questions:

1. What can it be used for? Closing costs, a buydown, the price, options, or a mix?
2. What is it tied to? A specific lender, a closing date, a specific home?
3. Can I use all of it? Seller contributions toward closing costs can't exceed your actual closing costs.
4. Where will it show up? It should appear on your Closing Disclosure at the end.

Loan programs also cap how much a seller or builder can contribute. Fannie Mae, for example, limits these "interested party contributions" on a primary residence to 3%, 6% or 9% of the price or appraised value, depending on how much you're borrowing compared with the home's value. Anything over the limit gets treated as a price reduction instead. Your lender knows the limits for your loan.

The lender question

Many incentives depend on using the builder's affiliated lender. That's common, and it can work in your favor. It also means you should compare.

Federal rules require a written disclosure when a company refers you to an affiliated settlement provider. It has to explain the relationship and estimate the charges. You should receive it no later than the time of the referral.

Here's how I'd handle it:

1. Get a Loan Estimate from the builder's lender with the incentive applied.
2. Get Loan Estimates from one or two other lenders for the same loan type.
3. Compare the rate, the APR, the origination charges and your cash to close.

The CFPB suggests comparing the same type of loan across lenders and looking closely at origination charges and the Comparisons section of each Loan Estimate. If the incentive still comes out ahead, take it. If it doesn't, you'll know why.

Get it in writing

An incentive you heard about in a model home isn't an incentive until it's in your contract or an addendum. Make sure the amount, what it applies to, and the conditions are spelled out. Then check the Closing Disclosure against it before closing day.

Incentives change often, and every builder runs them differently. Ask the sales consultant what's current, and ask for it in writing.

Who's writing this. I sell new homes for D.R. Horton at Collins Ridge in Hillsborough, so I represent the builder, not you. This guide is general education from my years on job sites and in sales. It isn't legal, tax or lending advice, and it doesn't describe any specific home, price or incentive. Check the sources linked below, and talk with your own lender, agent or attorney before you decide.