My agent is insistent I use their recommended lender when I found a better option. Am I breaking some unwritten rule?

November 23, 2015

You are breaking no rule. If anything, the agent is breaking the rules. It may even be illegal.

© 2015 Richard Montgomery

Reader Question: My offer was accepted, and I was thrilled. Before making the offer, my agent had instructed me to obtain a pre-approval letter and recommended I use a particular loan officer. I went ahead and did so after confirming with the loan officer that doing so wouldn’t lock me into using his services. I then found a better option and went back to the original loan officer to see about negotiating. I hadn’t made any decisions yet when my real estate agent called to say the loan officer had contacted her to let her know that I was considering an out-of-state lender. The agent was quite perturbed. She told me I was risking the whole deal falling apart, that the seller’s agent was going to be furious if I used another lender, and that the strength of our offer was in large part due to having the letter from this particular company. This takes me aback. My attorney reviewed the agreement to ensure that I wasn’t tied to that lender, as I had no opportunity to research financing beforehand. My agent insisted that by not using the same company who provided the pre-approval letter, I would be raising red flags about my financial stability as it would look as if my loan had fallen through and weakening our negotiating position with the seller for any potential repairs. Monty, what is going on here? Am I crazy for wanting to go to a bank that my family has a history with and has offered me better rates and costs? Have I broken some unspoken rule in the real estate business?

Monty’s Answer: Bully real estate agents sometimes unwittingly throw fuel on a fire or start a fire where no problem exists. You have a contract that has a contingency tied to obtaining a loan commitment. The seller has no influence during this period, and you can remove the contingency anytime before it lapses.

Some potential reasons

What would motivate an agent to recommend that you spend more money to obtain a loan and pay more interest over the term than you are required to pay? Naivety, improper training, or some “financial arrangement” or relationships with the lender are possibilities. If it is an undisclosed financial arrangement, it is most likely illegal.

You have not broken any unspoken rule; if anything it would be the agent. The Real Estate Settlement and Procedures Act (RESPA) rules prohibit certain non-disclosed activities including referrals, kickbacks and unearned fees that increase the cost of transactions to consumers. State law may include a provision indicating an agent will not treat any party to a transaction unfairly, which may also come into play. Here is a link a legal firm’s blog that details the rules for what are called affiliated business arrangements at http://bit.ly/1HhcmNg.

A snarky response would be to calculate the difference in closing costs and mortgage interest over the life of the loan and suggest you may be influenced to stay with her lender if she picks up the tab for the difference at the closing. Not to advocate this reaction, but it may take something like this for the agent to realize the impact of her suggestion and the inappropriateness of her advice.

Another possibility may be the “ripple effect” of legislation within the real estate industry reacting to the “derivative meltdown” and the government policies that created the foreclosure crisis. Today, many more real estate transactions fail because of lending regulation than in years past, and some real estate agents may overreact by monitoring for early detection of transactional problems or to attempt preventing a failure.

Be sure you are right, then go ahead

Follow your reasoning and the contract; it is your choice where to borrow the money. All you have to do is be sure when you eliminate the financing contingency that your finances do not change, and you have a solid, no-contingency commitment from your lender to show up at the closing with the agreed-upon funds.

Final caveats

The only question you may want to ask your chosen lender is for evidence they are licensed to make mortgage loans in the state if such licensing is required. Realize I have not seen the contracts. I have not spoken to the agent or the lender. There could be some other explanation, but I am unaware of anything here that would trump a well-written real estate contract.