Next time you buy a house, the seller may urge you to use a particular lender. But if you use the seller’s favorite lender, who really benefits? Are you going to get the best deal?
In some cases, you may save time and money by using the seller’s recommended lender, but you should shop around and recognize that there’s a potential conflict of interest, financial advisers say.
“You don’t have that second set of eyes looking out for you when you are working with a preferred lender,” says Ed Conarchy, a mortgage planner and investment adviser for Cherry Creek Mortgage in Gurnee, Illinois. “The lender is just coming along for the ride.”
Before weighing the pros and cons of using a preferred lender, you should first learn whether the lender and the seller have a financial tie. Sometimes the seller — a real estate agent or builder — simply refers the buyer to a lender they like to work with, but the two companies are not financially related.
In other cases, builders and brokerage companies send buyers to an affiliated lending company.
“That’s even more of a conflict of interest because the company giving you the finance is the same that is selling you the house,” Conarchy adds.
In the case of an affiliate, the seller is required to disclose to the buyer its business affiliation with the lender. Still, buyers may be tempted to pick the seller’s lender because the deal may seem too good to pass up.
Builders cannot require that buyers use their preferred lenders and cannot charge them a higher price for using a different lender. But they can offer incentives, such as credits for closing costs, to buyers who use their affiliate lender.
“It’s harder when there’s a financial relationship between the two, but if it seems like a good deal, I would say use them and get legal representation to review everything,” says Patty Da Silva, owner of Green Realty Properties in Davie, Florida. “Then you have one party that is not part of the transactions to look out for you.”
Federal law prohibits lenders from paying sellers for business referrals. Builders and real estate agents often refer clients to their trusted lenders based on their relationship. The closer communication between lender and seller and the fact that the lender is more familiar with the deal contributes to a smoother closing.
When you buy from a builder and use a lender who is not familiar with the development in which you are buying, there could be delays and confusions regarding closings costs, says Deb Holloway, a senior loan originator with Christensen Financial Inc.
“If you have a lender that is unfamiliar with this particular builder and doesn’t do his due diligence, it could result in thousands due at closing if the buyer is not aware of it,” she says.
Conarchy says that’s a valid point and one the buyer should consider. But as someone who worked as a preferred lender for more than a decade, he still questions the potential conflict of interest.
“The challenge is that in order for the lender to look good and still be given business and remain the preferred lender, they will do what it takes to look good in the Realtor’s or the builder’s eyes,” Conarchy says. “I think you have to choose a lender who is going to give you objective, independent advice.”
Buyers should shop around and compare the quotes they get from the seller’s preferred lender, Holloway says.
“A good lender should not be afraid of competition,” she adds.
Buyers could also ask the lender for references, says Da Silva, who has a preferred lender that helps with her deals. She recommends this particular lender based on the fact that the lender has done a good job in the past, but buyers are encouraged to shop around, she says.
“Everybody can give you two names, so ask for a large number of references,” she says.
There are instances when the seller’s preferred lender is the only choice a buyer has. That’s when you are buying in a new development that doesn’t meet the requirements of most lenders.
Lenders often require that a new condo development be partially sold before they lend in a particular development, says Rafael Castellanos, an attorney and managing partner for Expert Title Insurance Agency in New York.
“A lender is not going to lend to a new buyer with a building that is empty,” Castellanos says. “Sometimes the builder has an agreement with a lender to provide financing. In a situation like that where your regular bank may not be willing to lend, then a preferred lender is a good thing.”
The key is to have an attorney review the transaction, Castellanos says.
And if you do find other lenders willing to finance your new home, get several quotes to compare, even if the builder’s lender has made an offer that sounds attractive.
“Do your homework and go out shopping for your lender,” he says. “If you find a better deal, you have to be firm and say, ‘I’m not interested in working with your lender. I will secure my own lending.'”