What is a preferred lender? Should I take my Realtor’s recommendation?

Most people buy a home only a few times in their lives, and the process can feel overwhelming. Real estate agents are a valuable resource for guidance throughout the process — a seasoned agent can likely even recommend specific local lenders to their house-hunting clients. But is it in your best interest to take a lender recommendation from your Realtor? Are there any strings attached or potential consequences? Here, we’ll investigate preferred lenders, and the pros and cons of using one.

What is a preferred lender?

Put simply, if your Realtor refers you to a particular lender when you’re looking to buy, that is their preferred lender — one that they like to work with, for whatever reason. They might have worked successfully together on other transactions, or maybe the Realtor thinks this lender offers the best rates or terms, or maybe they’re just friends and recommend each other to all their clients.

“A preferred lender is one that real estate agents prefer to work with,” says Mike Roberts, a mortgage broker and co-founder of City Creek Mortgage in Draper, Utah. “It’s usually because that lender has a solid track record and a good relationship with the agent, and may be able to offer lower closing costs or quicker approvals — which makes life easier for everyone involved.”

If you are not yet pre-approved for a mortgage, the agent may simply want to confirm how much you can actually afford before agreeing to work with you. “To verify this, Realtors will typically refer the buyer to their preferred mortgage lender to start the pre-approval process,” says Andrew Fortune, Realtor and founder with Great Colorado Homes in Colorado Springs. “This is the most common way lenders get referrals from Realtors.” Once you are ready to buy, you do not need to stick with the same lender that pre-approved you.

Common questions about lender recommendations

That said, just because you get a recommendation does not mean you have to take it. Here are a few common questions buyers have about lender-Realtor relationships:

• Do Realtors get kickbacks from lenders? No, that would be illegal. Under the Real Estate Settlement Procedures Act (RESPA), Realtors cannot receive compensation for referring a lender (or vice versa). “This federal law prohibits unearned fees and kickbacks that can increase the cost of real estate transactions and negatively impact consumer interests,” says Jonathan Feniak, a Sheridan, Wyoming attorney who specializes in real estate. “It’s important for professionals in the real estate and financial industries to maintain ethical standards and comply with all regulatory requirements to ensure consumer protection and market integrity.”
• Can my Realtor require me to use a specific lender? No. “RESPA prohibits agents from obligating buyer clients to use their preferred lender,” says Spring Henry, a mortgage loan originator with Motto Mortgage in Marietta, Georgia. “Realtors are not allowed to require any lender, and doing so can result in the loss of their license and lawsuits.”
• Does my Realtor need to talk to my lender? Yes — there are certainly situations where your Realtor will need to be in touch with your lender, whether it’s their preferred one or not. This can include connecting on things like appraisals, for example. “Agents should definitely talk to the buyer’s lender on a weekly basis,” says Fortune. “Loans failing before closing is the number one cause of deals falling apart. If a Realtor trusts the lender to work the transaction without any accountability, and without staying in contact, that Realtor will likely experience a few deals falling apart.”

Pros and cons of taking a lender recommendation from your Realtor

If your Realtor has a strong and established working relationship with a particular lender’s team, that’s certainly worth considering. But it shouldn’t be the only factor in your decision. If you’re thinking about using your Realtor’s preferred lender, weigh these pros and cons.

Pros

• Smoother process: If your Realtor and lender have a level of trust and a solid history of working together, that can expedite the closing process. “The working relationship between the agent and lender can facilitate better communication and troubleshooting,” Feniak says. “A lender recommended by your Realtor may be more familiar with their process, potentially speeding up closing.”
• Local expertise: Part of what makes a local real estate agent so useful is their deep knowledge of your particular area and community. The same goes for a local lender — a lender preferred by a local expert will know the rules and customs of the local market well.
• Easier decision-making: A trusted recommendation can take a tricky decision off your plate. “Consumers are often overwhelmed by the homebuying process,” says Henry. “Being able to trust their agent and find a great lender via a simple referral takes a great burden off the buyer.”

Cons

• Potential conflict of interest: RESPA prohibits kickbacks for a reason: to protect you, the consumer. “The consumer might be getting a lender that is preferred because the lender gives gifts to the Realtor. This is against the law, but it happens every day,” says Henry.
• You might not get the lowest rate possible: Comparison shopping for mortgage rates is an important part of doing your due diligence, especially if your credit score is less than stellar. Going with the first offer you get might mean paying more than you need to. “There’s a possibility you might not get the best interest rate compared to shopping around among other lenders,” Feniak says. Even a slight difference can have a significant impact on the total cost of your loan.
• You might not get the most optimal kind of loan: There are many different types of mortgage loans, and not all lenders offer all types. Not shopping around might mean missing out on the loan program that would work best for you — if you’re a military veteran, for example, you might be eligible for a no-down-payment VA loan — and could cost you more money.

Bottom line

Your Realtor likely has professional connections and can provide recommendations if you ask — or might offer them even if you don’t ask. However, you’re under no obligation to work with their preferred lender. “A Realtor can recommend lenders they have had positive experiences with in the past and with whom they believe their clients will have a smooth transaction process,” Feniak says. “But it is ultimately the client’s right to choose their own lender.” Even if you wind up using the preferred lender in the end, it’s smart to shop around and compare first, to make sure you’re getting the best rate you can and the right loan program for your specific needs.