Which Mortgage Referrals Can You Trust?
October 8, 2001, revised October 19, 2004
“I am anxious about getting a mortgage because everybody wants to make money from me. How do I know who I can trust?”
In the home loan market, that is a critically important question.
In most markets, one party to a transaction usually has more information than the other. The information disparity in the home loan market, however, is unusually large. Most borrowers are in the market only a few times in their life. They have limited time to learn the rudiments, never mind the many nuances, of an extremely complex transaction. In contrast, the professionals on the other side of the table know the nuances because they deal with them every day.
With that kind of imbalance, trust is critically important. Without it, borrowers may bounce from one loan provider to another, wasting everybody’s time. Or they may stick with one but drive him crazy with questions, demands and suspicions that make the process unpleasant for everybody.
Most mortgage shoppers deal with this problem by following referrals. Most referrals come from real estate sales agents, borrower/friends, builders, and internet referral sites. In general, I rank their reliability in the same order.
Home purchasers 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.
Sales 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 it is not enforceable and violations occur – how frequently, nobody knows. I would much prefer a referral from an agent who doesn’t get paid by the loan provider.
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 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.
Builder referrals are usually to a lender with whom the builder has a financial arrangement. Hence, they are suspect.
In some cases, preferred lenders price loans above the market and kick back some of the excess to the builder. You can avoid this trap by shopping other sources.
It is not so easy to avoid the trap when the builder offers a concession if you use the preferred lender. In this case, 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 lose even more.
Suppose the builder pads the sale price by $5,000, but offers a concession of $5,000 if you use the preferred lender. The lender can price the loan, say, $3,000 above the market. If you take the loan, you are ahead by $2,000, 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.
The only way a buyer can avoid this trap is to refuse deals that tie concessions to use of a preferred lender. Offer the builder the ask price less the concession.
These are web sites that promise to send 4 lenders knocking on your door, competing to get your business. This can work to your advantage if you know what you are doing. If you don't, the 4 lenders compete to see which gets to take advantage of you. Read Mortgage Auction (or Lead Generation) Sites.
These are web sites that list the loan providers who pay them for doing so. They are of little value to borrowers, for reasons discussed in Are Internet Referral Sites Useful?
“I am anxious about getting a mortgage because everybody wants to make money from me. How do I know who I can trust?”
In the home loan market, that is a critically important question.
In most markets, one party to a transaction usually has more information than the other. The information disparity in the home loan market, however, is unusually large. Most borrowers are in the market only a few times in their life. They have limited time to learn the rudiments, never mind the many nuances, of an extremely complex transaction. In contrast, the professionals on the other side of the table know the nuances because they deal with them every day.
With that kind of imbalance, trust is critically important. Without it, borrowers may bounce from one loan provider to another, wasting everybody’s time. Or they may stick with one but drive him crazy with questions, demands and suspicions that make the process unpleasant for everybody.
Most mortgage shoppers deal with this problem by following referrals. Most referrals come from real estate sales agents, borrower/friends, builders, and internet referral sites. In general, I rank their reliability in the same order.
Real Estate Sales Agents
Home purchasers 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.
Sales 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 it is not enforceable and violations occur – how frequently, nobody knows. I would much prefer a referral from an agent who doesn’t get paid by the loan provider.
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 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 usually to a lender with whom the builder has a financial arrangement. Hence, they are suspect.
In some cases, preferred lenders price loans above the market and kick back some of the excess to the builder. You can avoid this trap by shopping other sources.
It is not so easy to avoid the trap when the builder offers a concession if you use the preferred lender. In this case, 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 lose even more.
Suppose the builder pads the sale price by $5,000, but offers a concession of $5,000 if you use the preferred lender. The lender can price the loan, say, $3,000 above the market. If you take the loan, you are ahead by $2,000, 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.
The only way a buyer can avoid this trap is to refuse deals that tie concessions to use of a preferred lender. Offer the builder the ask price less the concession.
Internet Lead Generation Sites
These are web sites that promise to send 4 lenders knocking on your door, competing to get your business. This can work to your advantage if you know what you are doing. If you don't, the 4 lenders compete to see which gets to take advantage of you. Read Mortgage Auction (or Lead Generation) Sites.
Internet Referral Sites
These are web sites that list the loan providers who pay them for doing so. They are of little value to borrowers, for reasons discussed in Are Internet Referral Sites Useful?