Who is most likely to refer me to a good lender

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A borrower can always depend on luck, by throwing a dart at the yellow pages. A referral is of value if it raises the probability of a good outcome above that from throwing the dart. The four major sources of referrals are real estate sales agents, other borrowers, Internet referral sites, and builders.

Home purchasers accept more referrals from real estate sales agents than from all other sources combined. Sales agent referrals generally are to individual loan officers or brokers, as opposed to firms. An agent with great confidence in a loan officer will continue to refer clients even when the loan officer switches firms.

Sales agents have the same interest as buyers in completing transactions. Hence, they refer clients to loan providers who can generally be depended upon to close on time. This is the agent's major concern, and it is a concern of borrowers as well.

Sales agents have no comparable interest in the mortgage price or whether the borrower is placed in the right kind of mortgage. However, the agent doesn't want the price to be so far out of line or the service so abysmal that the borrower throws a fit and blames the agent. Hence, referrals from sales agents are significantly better than throwing a dart at the yellow pages.

Referrals from other borrowers are usually based on a single transaction. They are better than the yellow pages, but not much better. I have seen borrowers who were very pleased with their experience because they were not aware that they had seriously overpaid. I have also seen the reverse—borrowers who bad-mouthed their loan provider, who had done the best possible job under adverse circumstances and had earned very little on the deal. Before acting on a borrower referral, grill the borrower about the basis for his or her opinion.

Internet referral sites provide price information for a large number of lenders and mortgage brokers, usually listed by state. They also provide quick entree to the Web sites of each loan provider listed. In theory, a borrower can sort through the list of loan providers, identify those with the lowest prices, and visit the individual Web sites to make a final selection.

To check on whether that strategy would work, I examined six referral sites:

  • Bankrate.com
  • BestRate.com
  • CompareInterestRates.com
  • Domania.com
  • Interest.com
  • LoanPage.com

I found that, in many cases, the lenders quoting the best prices on the referral sites were either quoting higher prices on their own sites or not providing complete price information on their own sites. I concluded that referral sites were no better than the yellow pages.

36. What's the difference between a mortgage broker and a lender—and what's the advantage of using a broker?_

A mortgage broker offers the loan products of different lenders, but does not lend. A lender makes the final decision regarding loan approval and provides the money to the borrower at the closing table.

Mortgage brokers counsel borrowers on any problems involved in qualifying for a loan, including credit problems. Brokers also help borrowers select the loan that best meet their needs and shop for the best deal among the lenders offering that type of loan.

Brokers take applications from borrowers and lock the rate and other terms with lenders. They also provide borrowers with the many disclosures required by the federal and state governments.

In addition, brokers compile all the documents required for transactions, including the credit report, property appraisal, verification of employment and assets, and so on. Not until a file is complete is it handed off to the lender, who approves and funds the loan.

The main advantage mortgage brokers have over lenders is their access to loan programs from many lenders. The mortgage market is complex and subdivided into countless niches and no one lender offers loans in every niche. For example, many lenders won't offer loans to borrowers with poor credit, borrowers who can't document their income, borrowers who can't make any down payment, borrowers who want to purchase a condominium as an investment, borrowers with very high debts, borrowers who need to close within 72 hours, or borrowers who reside abroad. The list goes on and on. But there are lenders in every one of these niches and brokers can find them.

Brokers are also experts at shopping the market. They receive price updates every day on all major programs from all the lenders they deal with. Price differences from lender to lender in the wholesale market in which they operate are much smaller than comparable differences in the retail market. Whether the broker uses that shopping ability to benefit the borrower or himself or herself is another question.

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