Real estate agents are asked a lot of questions. They typically juggle multiple parties and services, and provide referrals since most buyers don’t have the specialized contacts that the realtor does. A real estate agent has a list of experts such as inspectors, loan officers, or attorneys that they can recommend when needed. When it comes to your mortgage lender, it’s good to ask questions. Ask yourself; is the realtor’s preferred lender best for me or best for the realtor?
Let’s pull back the curtains a bit and understand how and why real estate agents refer mortgage lenders to their clients.
Why Do Realtors Refer Lenders?
It’s a mistaken impression that real estate agents get a referral fee from mortgage lenders when they refer business to them. It’s against the Real Estate Settlement Procedures Act, or RESPA, guidelines to accept referral fees from a mortgage company to an agent without full disclosure. Fees between lenders and agents or contractors can occur, but the charges must be disclosed upfront and there needs to be an executed Affiliated Business Arrangement, or ABA, signed by all parties, and this is not a common occurance.
Then why do realtors recommend preferred lenders? Real estate agents refer mortgage lenders because they trust the company to successfully close the transaction and complete the approval process. Depending upon the market area, it can take several weeks or months of showing houses to prospective buyers before any agent makes any money at all. On top of that, the agent works on a commission. If the deal doesn’t close, they get nothing. Real estate agents want the peace of mind knowing a preapproval letter from a trusted lender means everything will go smoothly and they won't miss a sale due to uncertainty from the lender.
Some real estate agents will only provide one preferred lender, others will provide several. And not all real estate agents choose lenders for the right reasons. So what should you do?
Best Practices Before Using Preferred Lenders
If you are given multiple names of mortgage loan officers, there are some things you can do to make sure you’re getting an independent referral, free from any referral fees. First, regardless of the names you’re given, get another mortgage company referral from someone you trust who is not in the real estate or lending business. Perhaps a coworker just bought a home or a relative across town recently closed a home purchase. Interview the loan officers that your friends refer to you as well as the loan officers your realtor refers, and see how they compare. It is also a good idea to choose a lender who has experience with the type of arrangement you have, such as choosing mortgage lender for your VA home loan. If your realtor gives the name of just one loan officer, it’s even more important to get a second opinion. However be prepared; some loan officers won’t do very much without a purchase agreement in hand.
Investigate Fee Arrangements
Some real estate offices have an on-site mortgage company as their preferred lender. Using an onsite office can sometimes mean the real estate brokerage gets a commission when the onsite lender receives a referral. Remember, referral fees for real estate transactions are almost always illegal. This referral fee system may be hidden in a "desk fee" the mortgage company pays to the real estate brokerage. The desk fee, a type of rental payment, may be far above what a typical “per square foot” rental would cost in any other environment, which means it is probably a way of camouflaging a referral fee. Be wary of these arrangements and do your homework before working with them.
Ask About Documentation
Finally, you want to use a mortgage company that takes care of all the processing and documentation in-house. This includes ordering and handling the appraisal process internally. Most lenders in the current environment use the services of an Appraisal Management Company, and this can be a problem. Once a lender turns over the job to an AMC, the lender loses control of the appraisal process. For the most transparent, efficient mortgage approval process, work with a lender that handles your loan approval from start to the very finish.
Preferred lender status doesn’t make the lending company less reputable. Your agent’s lender may be an efficient, high-quality company. Nonetheless, always do your homework. Before signing any agreements, make sure the lender is best for you. If you’re ready to purchase a home and you’d like to start investigating now get a rate quote today.