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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.
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?
Copyright
Jack Guttentag 2004
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