Can A Seller Force Me To Use Their Mortgage Lender?
Can a property seller or real estate agent force you to use their mortgage lender, and why should you always think twice about it?
This can be a particularly confusing, and frustrating question and scenario for home buyers, and especially first time home buyers. Sellers and their Realtors demanding, or at least scaring home buyers into using their lender for a purchase mortgage isn’t that uncommon. But is it legal? Is it ethical? What are the real pros and cons?
When Sellers & Agents Try to Force Buyers to use Preferred Vendors
Unfortunately, this isn’t a rare scenario to encounter in the real estate market today. Individual home sellers that have been burned by deals that fell apart before might demand home buyers use a lender they are confident in. Some listing agents have become notorious for this practice both in order to secure their own commission, and because they are pressured to by bosses or clients. Home builders frequently embrace this practice almost as a rule.
In some cases it is truly about ensuring the seller only contracts with a strong buyer who can get a purchase mortgage and close on time. In other cases it is clearly about kickbacks and finding extra profit in deals.
This doesn’t just happen with home mortgage either. Sometimes this extends to trying to force buyers to use specific escrow and title companies, as well as home inspector or insurance companies.
Threats & Promises
In many cases the sales pitch to use these preferred mortgage lenders can appear very convincing. In the case of buying new homes builders often offer what appear to be significant financial incentives such as discounts, home upgrades, and the promise of lower interest rates.
In other scenarios real estate agents simply won’t present offers to their clients unless buyers agree to use the brokerage’s partner lender.
It can appear highly motivating and appealing to do so when in a high pressure, highly emotional situation, especially when you’ve just fallen in love with a property after extensive searching.
The Risks of Giving in
While it can appear tough to refuse, there are some important things to be alert to in this scenario.
- Advertised discounts or upgrades can be overvalued, and are often more than made up for by high loan costs
- Once agreed to these situations can lead to buyers having more money at risk, and at the mercy of whatever final terms these lenders decide to charge
- Loan costs can be higher
- Could be used to hide defects or title issues, which other lenders would discover
- May be used to cover up seriously over-priced homes
- Home buyers can be unwittingly caught up in mortgage fraud
Overcoming the Challenge for a Better Purchase Mortgage
There’s nothing wrong with seeing what the seller’s mortgage company has to offer, but it’s always smart for home buyers to keep their options option, and shop around for the best deal.
Pre-empt this point of contention by going in strong, with a mortgage approval in hand, a good offer, and highlighting how great a buyer you are.
While laws differ slightly between states and destinations the general consensus is that trying to force first time home buyers to use a specific lender as a contingency of a purchase agreement is at least a red flag, if not unethical. According to attorneys weighing in on the subject at LawQA most see this as questionable, though not necessarily illegal. If illegal kickbacks are involved then this is definitely a serious offense which could end up with the FBI involved.
According to Realtor Mag on this scenario applied to title insurance services, it is definitely illegal, with severe financial penalties for those that engage in it.
If this does become an issue consider that it may just be better to walk away and find an easier seller and agent to work with. If they are acting like this upfront, it could only get much worse as the transaction progresses.
As a first time home buyer it can be hard to pass on your vision of a dream home, yet remember that this will likely end up just being a starter home, with several steps up coming in the near future. So look for a good deal, and work with reputable professionals.
