Shopping around for the best mortgage can save you thousands, but according to a recent report from Campbell Surveys, a large percentage of home buyers aren’t shopping around at all.
The report, “Building Effective Partnerships With Real Estate Agents,” conducted on behalf of Inside Mortgage Finance, said that more than a third of home buyers choose mortgage lenders based on their Realtor's recommendation, even though the Realtors who were contacted for the report said “low interest rates” were not a top concern.
"There's a lot of value in what Realtors have to say (about where to find loans), but it's important to make sure that you're getting a good long-term deal," says Tom Popik of Campbell Surveys in Washington, D.C.
Is your Realtor’s recommendation legal?
Federal law allows Realtors to recommend mortgage lenders to home buyers so long as they don’t receive anything of value in return, like cash or gifts.
Ken Trepeta, a lawyer with the National Association of Realtors in Washington, D.C., says the law even prohibits agents from sending customers to lenders in exchange for a referral.
But the law does allow Realtors to refer clients to mortgage companies that their firms partly or wholly own, provided that they disclose such "affiliate relationships" to consumers and don't directly receive anything of value for each recommendation.
Real estate and mortgage companies can also team up to jointly advertise or otherwise market their firms, although they still can't give each other anything of value for individual referrals.
37 percent of buyers take a Realtor’s recommendation
According to Popik, Realtors suggest specific loan sources to home buyers in 55 percent of financed home sales. From that group, 68 percent of buyers ultimately use that mortgage provider.
Campbell calculates that 37 percent of all mortgage-financed deals ultimately involve a lending source that a Realtor suggests.
Popik says that's theoretically great news for consumers because Realtors work so closely with mortgage companies and know who's good and who's not.
A Realtor’s top priority: Getting the deal done
However, Popik says the top priority for a Realtor is often different than a home buyer’s top priority.
"Agents have an incentive to recommend a lender that closes on time," Popik says. "That's often in a home buyer's interest, but buyers tend to value competitive rates and low closing costs even more because they're going to be paying that mortgage for a long time."
That sentiment is certainly expressed in the Campbell report.
According to the report, the top 10 reasons Realtors “like” a particular lender:
- Performance on meeting closing dates
- Local loan officer
- Reputation with homebuyer clients
- In-house lender for my brokerage firm
- Loan programs
- Your personal banking relationship with mortgage provider
- Lead time on closing dates
- Rates and closing costs
- Mortgage education for homebuyers
How to avoid a bad recommendation
Trepeta says buyers can avoid questionable recommendations by quizzing Realtors as to exactly why they endorse a given lender.
"Ask: 'What's so good about this company? Why should I use them? Why shouldn't I just go online and pick the guy who's advertising the lowest rate?'" he says. "The answer should always be something like: 'Because they have very competitive rates,' or 'Because they really know this area well.'"
John Councilman, president of the National Association of Mortgage Brokers (NAMB) in Plano, Texas, and president of AMC Mortgage Corp. in Fort Myers, Florida, says consumers should especially ask agents whether they have any advertising or marketing relationships with firms that they recommend. "If they say 'yes,' I'd probably say: 'Let me out of here!" he says.
Councilman believes the best way to avoid bad recommendations is to get preapproved from at least one source on your own long before you step into a Realtor's office.
He suggests starting by asking family, friends and co-workers to suggest mortgage lenders or brokers that they've had good experiences with in the past.
The NAMB also maintains a database of brokers that have earned the group's "Lending Integrity Seal of Approval" by passing background checks, agreeing to abide by a code of ethics and meeting other criteria.
And of course, you can also compare current mortgage rates at HSH.com.
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