Many real estate agents and home builders will offer recommendations for “preferred lenders.” These are lenders who they have worked with that Realtor® before. Or, in the case of a builder’s lender, it may be a lender who has a relationship with a particular housing development. It sounds like an enticing arrangement at first glance — “$5,000 toward closing costs!” “Appliance package included!” “$2,000 design allowance for upgrades!” — but does the buyer really win if they commit to the homebuilder’s lender to purchase their newly constructed home?
Using a preferred lender comes with the promise of certain named benefits, but it’s important to also consider the drawbacks. Below, we discuss the purpose of preferred lending as well as its advantages and disadvantages. We also provide general tips to follow before you choose a mortgage lender.
Remember, You Have Lending Options
The builder or Realtor® may tell you that “everyone uses them,” but that may not really be the case. They may represent a lot of their clients. However, you as a home buyer are under no obligation to use a preferred lender. It is always an option. You always have the right to choose your own lender in order to secure the mortgage that presents you with the best terms.
What is a Builder’s Preferred Lender?
Many preferred lenders—especially those associated with builders and newly constructed houses in developments—will present enticing offers that sound appealing. Maybe they offer a discount on closing costs, an appliance package or credit that can be later used toward upgrades. As a home buyer, it is your responsibility to dig below the surface level and make sure you are making the best financial decisions. It’s like any other form of shopping. You have to look at the options, study the features, understand the pricing and determine what you prefer. Of course, buying a home is the most expensive shopping you will ever do and it will impact your life for many years, so choosing your lender is an extremely important decision.
Just because the preferred lender is attached in some way to the builder or real estate agent does not necessarily mean they will be your best selection. In fact, these direct lenders are often owned by the builder or a shared parent company. The benefit is not necessarily in your favor. It is in their best interest to keep all the financial aspects of the real estate transaction in house. Those perks and special offers can come with major strings attached, such as higher interest rates that will cost you much, much more over the life of the mortgage loan. The very first thing you should do is understand the relationship between the builder and the lender, and then read any contracts or mortgage offers very carefully. There could be a potential conflict of interest that you shouldn’t be comfortable with.
What is a Realtor’s Preferred Lender?
Preferred lenders recommended by Realtors® will often have a referral system in place. They provide leads to one another and it’s a fruitful relationship. There isn’t anything inherently wrong with this and there can be some advantages, especially if you trust your real estate agent and they have real trust in their lender. It helps to have strong communication between your Realtor® and lender, so an existing relationship is often a positive benefit. Again, it is just helpful to understand the working relationship and research outside options in case you can find something that suits you better. It’s probably worth your time to talk to that lender, as well as a few others, before making your selection.
What if My Condo Community Offers a Lending Option?
Some condo communities may have a preferred lender that is actually your only option. This may limit your mortgage options and may not provide the best rates and terms. Just be careful before signing on the dotted line. A sketchy home loan from a condo association’s direct lender may be enough to make you look elsewhere for a more attractive housing situation. Always read the fine print, and if you do have the option to find your own mortgage financing (which is often the case), explore your choices further.
When looking for a good lender (whether it’s a preferred lender, direct lender or mortgage broker), you want to search for certain qualities. You want someone who will consider your unique financial situation and help you make good financial decisions. You want a lender who offers a wider range of mortgage products and competitive interest rates.
Direct Lender vs. Mortgage Broker
As you search for your lender, it also helps to understand the differences between banks, direct lenders and mortgage brokers. Banks may offer mortgage loan services as part of a wide variety of financial services, and they may ultimately purchase home loans from other lenders. A direct lender is a lending institution that offers mortgage products. They typically rely on credit lines to fund their loans. This often leads to higher interest rates, increased closing costs and more stringent qualification standards.
A mortgage broker is very different because they acting on the borrower’s behalf. They aren’t tied to one specific lending source or a limited amount of mortgage products. They can help the home buyer “shop around” and find the best mortgage loan for their unique financial situation. A good mortgage broker will guide you through the lending process and coordinate your applications with the direct lenders. If you are talking to multiple direct lenders and banks on your own, you will have to apply to each institution individually.
Explore Your Lending Options
The point is, if you are buying a home and seeking out a mortgage loan, you need to do your research and explore your lending options. Don’t just work with the lender because they are “preferred” by your builder or Realtor®. Don’t assume that working with a direct lender will get you a better loan than going through a mortgage broker. Ask around, talk to multiple sources and find someone that you trust to give you the best lending experience.
For all your mortgage lending needs, contact MoreiraTeam today!