The next time you buy a home, the seller may encourage you to go to a specific lender. But if you are using the seller’s preferred lender, who does it really benefit? Are you going to get the best deal?
In some cases, you can save time and money by using the seller recommended lender, but you should shop around and recognize that there is a potential conflict of interest, according to financial advisers.
“You don’t have that second pair of eyes watching you when working with a senior lender,” says Ed Conarchy, mortgage planner and investment advisor for Cherry Creek Mortgage in Gurnee, Illinois. “The lender is just coming for the ride.”
What is the relationship?
Before weighing the pros and cons of using a preferred lender, you must first find out if the lender and the seller are financially related. Sometimes the seller – a real estate agent or a builder – simply refers the buyer to a lender they enjoy working with, but the two companies are not financially linked.
In other cases, builders and brokerage firms send buyers to an affiliate loan company.
“It’s even more of a conflict of interest, because the company that finances you is the same one that sells you the house,” Conarchy adds.
When the seller is the lender
In the case of an affiliate, the seller is required to disclose to the buyer their business affiliation with the lender. Still, buyers may be tempted to choose the seller’s lender, as the deal may seem too good to be overlooked.
Builders cannot require buyers to use their preferred lenders and cannot charge them a higher price for using a different lender. But they can offer incentives, such as credits for closing costs, to buyers who use their affiliate lender.
“It’s more difficult when there is a financial relationship between the two, but if it sounds like a good deal, I would say use them and get legal representation to look into everything,” says Patty Da Silva, owner of Green Realty Properties in Davie, Florida. “So you have a part that is not part of the transactions to watch over you. “
No incentive, but a recommendation
Federal law prohibits lenders from paying sellers for trade references. Builders and real estate agents often refer clients to their trusted lenders based on their relationship. The closer communication between the lender and the seller and the fact that the lender is more familiar with the matter contributes to a smoother closing.
New home loans
When you buy from a builder and use a lender that is unfamiliar with the development you are buying into, there can be delays and confusion over closing costs, says Deb Holloway, an initiator of senior loans at Christensen Financial Inc.
“If you have a lender who doesn’t know about this particular builder and doesn’t do their due diligence, it could end up in thousands of deadlines at the close if the buyer isn’t aware,” she says.
Conarchy says this is a valid point and one that the buyer should consider. But as someone who has worked as a preferred lender for over a decade, he still wonders about the potential conflict of interest.
“The challenge is that in order for the lender to look good and always get business and remain the preferred lender, they will do whatever it takes to look good in the eyes of the realtor or builder,” explains Conarchy. “I think you need to choose a lender who will give you objective and independent advice.”
Buyers need to shop around and compare the quotes they get from the seller’s preferred lender, Holloway says.
“A good lender shouldn’t be afraid of the competition,” she adds.
Buyers can also ask the lender for referrals, says Da Silva, who has a preferred lender who helps them with their transactions. She recommends this particular lender based on the fact that they have done a good job in the past, but buyers are encouraged to shop around, she says.
“Anyone can give you two names, so ask for a lot of references,” she says.
When should you use a senior lender
There are cases where the seller’s preferred lender is the only choice the buyer has. This is when you buy into a new development that does not meet the requirements of most lenders.
Lenders often require that a new condo development be partially sold before lending in a particular development, says Rafael Castellanos, lawyer and managing partner of the Expert Title Insurance Agency in New York City.
“A lender is not going to lend an empty building to a new buyer,” says Castellanos. “Sometimes the builder has an agreement with a lender to provide financing. In a situation like this where your regular bank may not be willing to lend, then a senior lender is a good thing.
The key is to have the transaction reviewed by a lawyer, says Castellanos.
And if you find other lenders willing to finance your new home, get multiple quotes to compare, even if the builder’s lender has made an offer that looks appealing.
“Do your homework and go shopping for your lender,” he says. “If you find a better deal, you have to be firm and say, ‘I’m not interested in working with your lender. I will get my own loan.