Which Referral is the Best?

Most mortgage shoppers find a loan officer by following

referrals.  The question is, which referral source is the best? Here are some comments on the major sources:

Real Estate Sales Agents: Homebuyers accept more

referrals from real estate sales agents than from all other sources combined. The homebuyer often establishes a relationship with the agent during the house-hunting phase, and the agent is there when the need for a mortgage arises. Sales agents have the same interest as buyers in getting deals done. Hence, they refer clients to loan providers who can generally be depended upon to close on time.  Agents have no comparable interest in the mortgage price, and are not concerned if the price is a little above the market. However, the agent doesn't want the price to be so far out of line that the borrower throws a fit and blames the agent.

Loan providers spend a lot of time cultivating the favor of sales agents. The law prohibits paying for referrals, but violations do occur.  

Realtor In-House Lenders: A special case of sales agent

referrals are those to in-house or "captive" loan providers. These are loan providers who have a close financial relationship with Realtor firms. Most large Realtor firms in-house lenders.

It might appear that in-house lenders present the same problems as builder captives, which are detailed below.  But there are significant differences. In the case of in-house lenders, referrals do not involve house price concessions, and the abuses associated with this practice.

Additionally, referrals to the in-house lender are made by

individual sales agents, not by the Realtor firm. Sales agents are independent contractors and can't be forced to refer their clients to the in-house lender. The lender must earn the trust and confidence of the agents. Many Realtor captives have failed because they have not been able to do this.  On the other hand, a Realtor’s trusted outside lender may not be available at the moment you ask for a lender referral, making the captive lender a convenient, though below standard, solution. It is important then, to

understand your Realtor’s motives if he or she refers you to an in-house lender, and best to ask for two to three referrals if your Realtor is your trusted resource.

Other Borrowers: Your close friend strongly recommends a loan provider he recently used. You know the source of the referral is trustworthy and has no financial interest in your selection, and that's very important. But the opinion is based on a single experience that might be skewed - especially if his or her transaction and yours are very different.

Here are some questions to put to your referral source: First, how well did you do in the pricing, and how do you know? Did you shop other sources?  Second, how well did the loan officer do in Q and A? Was he willing to take the time to answer your questions? Have you checked any of his answers against other sources?  Third, how reliable was he? Did he do what he said he was going to do, when he said he was going to do it?

Referral from a trusted source can be valuable, but only if the source has solid reasons for it.

 

Builders: Builder referrals are often to a lender with whom the builder has a financial arrangement, so it’s a good idea to ask for more than one if you’re going to ask your builder for a referral. In rare (and illegal) cases, referred lenders price loans above the market price and kick back the excess to the builder.  You can avoid this trap by shopping other sources.

However, many builders team up with lenders and offer a price concession when you use that lender.  In some of these cases, the concession truly is a rebate arranged to increase sales.  I most cases however, the builder has padded the house price, and is offering back part of what has been taken from you. If you don't accept it, you pay extra.

For example, the builder pads the sale price by $3,000, but offers a concession of $3,000 if you use the preferred lender. The builder gives the $3,000 to the lender, who then prices the loan $2,000 above the market. If you take the loan, you are ahead by $1,000, relative to turning it down. But you are out $3,000 compared to what you would have had to pay if the builder had no preferred lender and didn't pad the sale price. 

A buyer can avoid this trap one of two ways: one is to refuse deals that tie concessions to use of a preferred lender.  The other is determine whether the house or the loan are above market (a $2000-heavy loan is generally pretty easy to spot).  This takes a bit of research, but is useful if you feel you are being bamboozled.

Name Lenders: Some borrowers seek the comfort of a trusted name as their loan provider. Their logic is that a lender with a reputation to protect is not going to jeopardize it by over-charging borrowers.

There is some but not much merit in this approach. Some name lenders systematically price above the market. Their policy is that borrowers should pay for the comfort of dealing with them.

In addition, the loan officers employed by these lenders have  some discretion in pricing loans. If the loan officer tabs you as unknowledgeable and timid, you will probably pay an "overage" -- a price above the price listed on the loan officer's price sheet.  The lender and the loan officer usually share overages. If you are smart and forceful, on the other hand, you might get an underage

-- a price below the listed price. In general, there are many more overages than underages.

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