Why You Should Talk to Lenders Before Your Real Estate Agent
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Which comes first, the lender or the real estate agent? This home-buying question is the chicken or egg debate of real estate, but it’s important to consider if you will need financing to help you purchase a home.
Buying a home can be a very emotionally charged experience, and there is nothing worse than having your chances for your dream home dashed by the reality of mortgage qualifying guidelines.
In this article, we’ll discuss why you should talk to a lender before you even begin looking for houses online, much less dropping by an open house this weekend.
- Why lenders should be your first call
- One reasons homeowners might not shop for a lender
- Why you shouldn’t call a real estate agent first
- How much you’ll save by shopping for your own loan
- When you should call a real estate agent first
Why lenders should be your first call
If you’re anything like 88% of home purchasers in 2018, you’ll need a mortgage to buy a home. This means you should start a dialogue with a loan officer sooner rather than later.
It’s important that you get an idea of what your payments will be before you start getting attached to a home that would be a stretch for your budget. You also will have time to shop around for a good rate, instead of being pressured to move quickly because you are worried you might miss out on the home you want to buy.
The interesting thing is, contacting a bank or mortgage doesn’t even make the top three in a recent study of homebuyers’ first steps conducted by the National Association of Realtors. Most homebuyers begin their journey by looking online for properties for sale, followed by a call to a real estate agent, and then a search for information about the homebuying process.
Contacting a bank or mortgage lender and getting pre-approved comes in a distant fourth place.
Even though logic might argue that if you need a mortgage you’d want to speak to a mortgage lender first, the reality is homebuyers aren’t doing that.
In fact, the study clearly shows realtors are the initial contact point. So how are the consumers getting to the mortgage companies they contact in step four? The hint may be in this statistic: About one in five homebuyers relied on their real estate agent to provide them with a “better list of mortgage lenders.”
Despite having a full list, not many borrowers apply with more than one lender. A report by the Consumer Financial Protection Bureau showed 77% of borrowers applied to only one lender.
With so many mortgage lenders to choose from, why aren’t borrowers shopping more for a debt that they could have for the next 30 years?
One reason homeowners might not shop for a lender
You might get close to the answer by understanding the role that mortgage and real estate partnerships play in the homebuying process. It’s a common practice for real estate salespeople to be the gatekeepers guiding you to a mortgage company.
Real estate agents will generally refer buyers to their preferred lender on the premise that they can get deals done on time, know what they are doing and have a track record of getting loans approved at competitive interest rates. In some cases, the loan officer may have an office right in the real estate company’s building, making it convenient if you want to get your loan approval and start your home search under one roof.
You may have found a house on a realtor’s Zillow homepage that you like, only to be promptly called by the preferred loan officer within minutes of clicking on the property information to find out if you’ve already been pre-approved. One reason that you were called so quickly is because that loan officer is paying for marketing on that realtor’s website.
The Real Estate Settlement Procedures Act (RESPA) is part of a federal law that governs how realtors and mortgage companies work together, and it expressly prohibits agents from receiving anything of value from a mortgage professional in exchange for the referral of business. However, many agents have co-marketing agreements, which basically means they share the expense of marketing each other’s services to consumers. This creates some grey areas.
Loan officers are not going to share the expense of hundreds, if not thousands, of dollars in marketing with a real estate company, unless they can potentially get some business. However, the rules say that as a consumer you can’t be forced to use a lender that is marketing with a particular realtor, so you should never feel pressured into choosing a loan officer because of a realtor referral.
Even though you don’t have to use the realtor’s preferred lender, you can expect that the realtor will discourage you from using anyone else, and may even indicate that sellers might not accept a pre-approval from some lender they haven’t heard of.
Why you shouldn’t call a real estate agent first
It is important to note that real estate agents are not licensed to provide mortgage services in most states. In fact, some loan programs such as FHA mortgages strictly prohibit dual licensing in real estate and mortgages.
Real estate agents also aren’t required to take any continuing education classes in real estate finance, which means they may not be up-to-date on the most recent changes in mortgage finance guidelines, which are in constant state of change as the mortgage market continues its full recovery from the housing crisis just 10 years ago.
Real estate agents are salespeople, and the best agents want you to picture yourself living in the homes they are showing. If you need a mortgage but haven’t talked to a loan officer about whether you can afford that home, it may take awhile to recover from the sting of finding out you are buying more house than your budget allows.
How much you’ll save by shopping for your own loan
According to a recent Mortgage Rate Competition Index report from LendingTree, homebuyers could have seen median lifetime savings of $41,548 in interest on a $300,000 loan if they comparison shopped for the best mortgage rates. This represents the difference between the best offers provided by lenders on the LendingTree platform compared with noncompetitive, but common offers. Despite this significant potential savings, most homebuyers are not shopping.
That could be due to a few persistent myths about the dangers of rate shopping.
Common lender shopping myths
My credit scores will go down if I apply with too many lenders
New mortgage credit scoring algorithms look at inquiries within a 45 day period as one inquiry, so this is simply not true. You will have to explain to the final lender you choose, the reason for all of the inquiries, and confirm that you are not opening any new credit besides the mortgage you have decided on.
All lenders basically have the same rates
Like any financial product, sometimes a financial provider decides they want to be the market leader for a particular loan type, such as VA loans or conventional loans targeted to first-time homebuyers. They may offer credits to cover closing costs, or offer very competitive rates for a specific period of time.
Some lenders may feel justified in charging higher rates for more personalized service, and offer things like local underwriting, which gives you access to decision makers during the loan approval process.
They’ll never deliver that rate
One mortgage scam that can occur is a “bait and switch.” A lender quotes a rate they know they can’t deliver. Later in the process, they’ll give you some reason that you can’t get the rate they promised, like a guideline that was just changed, or something about your income or credit that they just discovered would be a problem.
You have the right to file a complaint with the Consumer Financial Protection Bureau, a regulatory agency created after the 2008 financial crisis tasked with protecting consumers, including mortgage borrowers, from abusive lending practices. Because the complaints are available for public viewing, reputable lenders aren’t going to risk the bad press, and the loan officer making this accusation may simply be upset that they can’t compete against a particular lender’s pricing.
The seller may not accept a pre-approval from an unknown lender
Bigger is not always better when it comes to lending, and just because a lender is recognizable in a particular city or state doesn’t mean that they can deliver good service at a competitive rate, any better than a small mortgage brokerage. All mortgage companies are held to national and state-level licensing requirements that are the most stringent since the housing meltdown, and it’s relatively easy for you verify the licensing status of any company you contact.
When you should call a real estate agent first
Realtors are a valuable asset when you are buying a home. Experienced realtors understand the nuances of each neighborhood, and can often anticipate when values are starting to rise, or may have contacts in the community allowing them to get you in to see a house that is a real bargain.
They help negotiate contracts, and take ongoing licensing classes to stay up-to -date on the latest changes in the real estate industry. They can also jump in if something goes wrong, such as a seller objecting to making a repair that was agreed to, or renegotiating a sales price if an appraisal comes in lower than the initial price.
If you don’t need mortgage financing to buy a home, or know that you can’t qualify for a mortgage but have other means to buy a house, call a real estate agent first. Making a cash offer to purchase a property, including a distressed property like a foreclosure or a home being sold at an auction, requires a knowledgeable realtor.
Some sellers may be willing to become banks, doing something called seller financing, or a seller carryback. In this case, the seller becomes the lender, creating repayment terms that may require a non-refundable down payment, and a balloon payment within a predetermined time period.
Because these are such sophisticated purchase strategies, talking to a real estate agent is essential, and may make the difference between completing a cash-only or seller-financed purchase.
The bottom line
If you need a mortgage, your first phone call should be to a loan officer to determine what you can get pre-approved for. While it’s OK to trust the referral of a realtor for your mortgage, you should also do some homework on your own to make sure you’re getting the best rate at the lowest costs and best service possible.