Real estate agents often hand out lists of recommended mortgage lenders. An agent can't survive in the real estate business without a good mortgage lender or two to refer.
There's zero financial incentive to an agent in such a recommendation, but it can result in some grateful clients who will remember these small touches that made the whole buying process easier. In fact, buyers often don't know which they should do first—select a mortgage lender or hire a real estate agent.
The bottom line is that you should know what to be alert for, whether you're taking your agent's recommendation for a lender or you're launching a search on your own.
Which Comes First?
You might not know whether you'll even qualify for a mortgage if you hire a real estate agent to start showing you homes without first getting preapproved by a lender. And you won't be able to make a valid offer on a home without a preapproval letter if you come across the perfect place on your first day out touring.
That said, there are some advantages to hiring a real estate agent before selecting a mortgage lender. Your real estate agent will be with you from start to finish and involved in all facets of your home-buying experience, but a lender handles only the financing.
Do Agents Receive Kickbacks?
It's against RESPA rules for agents to receive kickbacks for referrals to mortgage lenders. A lender can't reward a real estate agent for sending business its way.
Section 8 of the RESPA prohibits anyone from receiving compensation or any sort of payment in exchange for a referral on a federal mortgage loan, and almost all conventional loans are sold to government-sponsored entities such as Fannie Mae or Freddie Mac. The remainder are either federal FHA loans or VA, so RESPA applies to just about every mortgage loan.
Interest Rates and Fees
Popular banking websites dangle sparkly interest rates and APR rates in consumers' faces, but the interest rate and loan fees aren't the most important factors to consider when you're choosing a mortgage lender, even one recommended by your agent.
The bottom line is that most lenders actually charge about the same rates. They have access to pretty much the same bags of money. All national institutional lenders compete against other institutional lenders, and their rates are highly competitive.
They're also limited in the types of loans and terms they can offer, and they often quote only in-house rates.
A mortgage broker might have access to larger pools of money from a wider variety of sources.
Rates change more than once daily, so that interest rate can vary until your loan rate is locked. A rate promised in the morning could be higher by afternoon. Don't be lured by 1/8 of a percentage point that can swing up or down. You can see how different interest rates can affect your monthly payment and the overall cost of the loan by using our mortgage calculator.
Those 'Special' Deals
A mortgage lender might also advertise special deals, such as "free" appraisals, but the cost of that appraisal might actually be buried elsewhere. Or a lender might offer you a "free" home security system when the cost is actually absorbed into the monthly fee you're required to pay to for ongoing service.
Don't get suckered by slick websites and fast-talking sales pitches. Saving yourself $300 on a $300,000 loan is minuscule and pretty much worthless if the loan doesn't end up funding.
The most important thing a mortgage lender can do for you is process your loan quickly, efficiently, without errors, and close on time.
Should You Consider a Realtor-Recommended Lender?
Your real estate agent wants your transaction to close smoothly, without hiccups or surprises, and one of the biggest factors involved with buying a home is the financing end of the arrangement.
Many things can go wrong, from a mortgage lender being careless when scrutinizing the loan application to misplacing documents or not asking for the right documents. It might overlook potential trouble spots and red flags, or neglect to order an appraisal so the file can't be closed on time.
Real estate agents who routinely close a lot of business have experience working with a variety of lenders, and they know which of them will deliver. You can rely on your agent's intimate knowledge by choosing the mortgage lender your agent recommends.
These lenders also realize that the agent will stop referring business if they don't perform to the agent's expectations.
Most homebuyers want their new home purchase to be handled thoughtfully. They want to close within the contract period. That scenario is more likely to happen if you use your agent's mortgage lender.
A Final Word of Warning
Many mortgage loans are sold after closing. Don't assume that your loan will remain at that bank if you choose a bank out of loyalty because you maintain accounts there.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.