Sure, preferred lenders sound enticing when you hear about the benefits from your builder or real estate agent. But does the buyer really win by using them?
First, remember that using a preferred lender is always optional. You never have to use a real estate agent or builder’s preferred lender, even if they claim others “always use them.” You have every right to use the lender that works best for you.
This article will give you everything you need to know about realtors’ preferred lenders, builders’ preferred lenders, and what exactly a direct lender is (and how it’s not as advantageous as they claim). We’ll help you answer the question: should you use a preferred lender?
Should You Use Your Builder’s Preferred Lender?
A builder’s preferred lender is one the builder recommends and has a professional relationship with. The preferred lender may be owned by the builder or owned by a third party the builder has a partnership with.
First, find out the link between the builder and the lender. If the lender is affiliated with the builder, there’s a potential conflict of interest, since they are selling and financing your new home. That could lead to a bad deal for you. (If you use a lender that’s owned or affiliated with a builder, get legal representation to review the deal. They will help make sure there’s nothing amiss with your loan deal.)
Ask the builder for a breakdown of what benefits their preferred lender provides. If the lender provides upgrades, unusual closing cost benefits, or access to unique programs, it may be worth looking into. A builder’s preferred lender could also make for a smoother closing process.
If there are no notable benefits to the builder’s preferred lender, you likely will be as good or better off using a different lender of your own choosing. You’re often better off shopping around for a mortgage than applying to one lender. Shopping around provides you a wide range of products and rates.
Should You Use Your Realtor’s Preferred Lender?
Like builders, realtors also often work with preferred lenders. And again, you are under no requirement to use your realtor’s preferred lender. In some cases of condo housing, it may be the only lender option available to you, but always do your own research when someone tells you there are no other options.
There are pros and cons that come with using a realtor’s preferred lender. The biggest advantage is that a preferred lender will work well and communicate smoothly with your realtor, which can make the process run smoother.
So, what’s the biggest disadvantage to a realtor’s preferred lender? They may not offer competitive rates.
With a realtor feeding them clients, a preferred lender could assume they have already locked your business and not do as much to offer you the best loan type, rate, or cost that works for you. If the preferred lender does not offer a wide range of loan types, you could miss out on a loan structure that would serve you better.
Realtors do not get paid by preferred lenders. It’s purely a term to signify a realtor’s working relationship with a certain lender. A realtor often picks their preferred lenders based on qualities that impact them, not necessarily their clients. Think of a real estate agent’s preferred lender like a personal referral.
When deciding whether to use a preferred lender, remember: any lender who doesn’t consider your unique financial situation, offer a range of products, or offer a competitive rate isn’t a good lender.
What is a Direct Lender?
A direct lender often gets confused with actual banks or mortgage brokers, but they are very different. A direct lender is a lending institution that offers mortgages. Most direct lenders primarily focus on mortgage lending and rely on credit lines to fund loans.
In contrast, a mortgage broker helps you shop from multiple sources and compare loan offerings. They guide you through the process and help you choose the best loan for your financial circumstances. You don’t have to apply for each loan separately either – they do that for you.
With a direct lender, lending options are more limited than what mortgage brokers offer. Brokers work with banks, credit unions and deposit banks, whereas direct lenders only work with a few investors. Due to the limited investor number and reliance on credit lines, direct lenders typically have higher rates, costs, and more stringent qualifying criteria.
A direct lender processes your application and decides whether or not to approve you for the loan. Without using a mortgage broker, you will be applying separately to each lender.
A direct lender typically processes everything in house, which may make the process slightly faster for you, but in regards to overall rate offering and range of offerings, they are usually worse or, at best, equal to what a mortgage broker provides.
Some misunderstood facts about direct lenders are that they have increased flexibility in approving a mortgage because they are the gatekeepers to the loans. While that may be true in some cases, the ultimate reality is that a good mortgage broker will have relationships with lenders who can offer the same flexibility, often at the same or better rate, and at a lower cost.
The Bottom Line
Preferred lenders and direct lenders may sound great, but you should always take a closer look at what’s being offered. Whenever you limit your lending options – like going with a preferred lender or direct lender – you could pay higher costs and settle for a less competitive rate.
We know we’re biased towards mortgage brokers (being one ourselves), but we’re only biased because we know they provide you more options than any preferred or direct lender ever could. We have clients all the time come to us looking to refinance mortgages with uncompetitive terms.
At the end of the day, shop for your mortgage carefully. That’s what we do for our clients. If you’re interested in shopping around for a great mortgage, give us a call or chat us directly on Facebook.