Hidden Costs & Conflicts of Interest When Buying a Home
This is a guest post written by Josh Mettle (NMLS #219996) of Fairway Mortgages. Josh is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNA, and physician assistants. You can get more great physician real estate and physician mortgage advice here or by visiting his book site. We have no financial relationship at this time. Today he will write about hidden costs of buying a home and potential conflicts of interest along the way. Take it away, Josh!
If you are like many of the physician clients I work with, you’re likely unclear how mortgage and real estate professionals are paid. You might even assume that because you are a doctor, the eyes get big and the real estate or mortgage person you are working with only sees dollar signs. Since this is not your area of expertise, they might be able to take advantage of you and make an unfair profit.
Here are a few comments I hear from physician clients regularly:
“I’m not going to use a Realtor. I can find a home on Zillow or online without an agent.”
“What is your rate? I’m calling to see who will give me the lowest rate and that’s who I will go with?”
“Can you send me a Good Faith Estimate before I give you my information?”
The problem with the way these clients are going about shopping for a home and a lender is that it is all backwards. It’s the exact opposite of how I shop for a Realtor or lender when I want to buy a home, an investment property, apartment building, or office building.
As a side note, I’m a fourth generation real estate investor. I currently co-own and co-manage over 120 rental units in Salt Lake City, UT. I bought my first rental property when I was twenty years old and I’ve never looked back.
Buying hundreds of units and taking out dozens upon dozens of residential and commercial mortgages over the last twenty years, I’ve learned a few things about the real estate and mortgage industry.
Paying Realtors & Mortgage Lenders
Let’s first discuss how Realtors and mortgage lenders are paid, which will help us uncover any conflicts of interest and help you know what to worry or not worry about.
Realtors traditionally are paid a six percent fee by the seller to list and sell a home. Let’s say that I’m going to sell my home for five hundred thousand. That means I have to account for thirty thousand of the proceeds being paid out as a commission to the listing Realtor at closing.
If they market your home, hold open houses, send postcards, spend hours marketing and talking to potential buyers and the home does not sell… they make nothing.
As a buyer, if you decide to make an offer on that home and you are not represented by a Realtor, which is called a buyer’s agent, then the listing agent makes the full six percent commissions. If you do have a buyer’s agent representing you, then your agent and the listing agent split the six percent commission and they each get three percent.
In most instances, this is not negotiable. Once a seller signs a listing agreement they have legally agreed to allow the listing agent to market the home for sale and consented to payout the six percent commission. If you come along unrepresented, the listing agent in most cases is not going to arbitrarily agree to reduce their commission.
Think about it for a moment. It would be like someone coming to a hospital and for some reason deciding to pay cash instead of using their United Health insurance card. Is the hospital going to offer them a forty percent discount because they paid cash? Not likely.
Is that evil or manipulative? No. That is just how the industry works. We understand it and we move on.
A Good Realtor is Worth The Money
The point I’m trying to make is, as a buyer of real estate, it costs you nothing in most instances to be represented by a professional Realtor, and it makes little sense to do it yourself.
Let me give you an example of how convinced I am that a good Realtor with a great local reputation is worth their fee.
My Wife, The Realtor
My wife went out and got her real estate license for the buying and selling of personal properties. After a few years I realized that yes, we are saving some money in commissions. But I also wasn’t seeing as many opportunities. She was busy with her life and taking care of the family, which meant she wasn’t out scouring investments full time like my realtor had been.
When we went to sell a property, we were always second guessing ourselves on the market value. In fact, we ended up selling one property very quickly and I believed we left a lot of money on the table because we were not as knowledgeable as we thought we were.
Finally, I asked my wife to let go of her license. I convinced her and my other partner that we needed to find and use the best Realtor in the area. The Realtor we chose would have deals come up that would never even hit the multiple listing services. They would negotiate with the other Realtor (most of which he’d done business with before) better than we could. In the end, they are more in tune with the market movements and help us price properties better.
As someone who has been in this game for a long time and owns a lot of real estate, I use a Realtor. It saves me significant time and even more stress. I look at it as insurance I purchase so that I don’t make a short-sighted mistake. I think it’s worth it, especially in the current real estate market which is extremely difficult to find and contract a good home in.
Mortgage Brokers versus Mortgage Lenders
What about mortgage lenders and mortgage brokers? We all know we need one to finance a home, but isn’t the lowest priced lender always the best?
I’ll leave that question up to you to answer after I share with you the facts about how both mortgage brokers and mortgage bankers are paid.
First of all you should understand the difference between a mortgage broker and a mortgage banker, or lender.
A mortgage broker does not make loans, they take your application and all of your documents and submit that data (you hope in a secure fashion but there is very little regulation on brokers) to an investor (think Wells Fargo, Bank of America, etc.).
The investor sends you the legal disclosures, orders the appraisal, underwrites the loan, sends the final closing disclosure, closing documents and wire to the title/escrow/attorney (depending on the state you are buying in) for closing.
Since brokers are not the direct lender, I find they are not very good at difficult loans and many of them don’t have any control over how fast the deal closes. Remember, mortgage brokers do not control the disclosures, the appraisal being ordered, the underwriter, etc. The people doing those jobs are not employees of the broker.
For this reason, mortgage brokers don’t have ultimate control. They submit your package to the lender and then sit back and wait for the investor to respond.
Mortgage brokers also do not have the same opportunity to ask for exceptions or variances as do direct lenders. So, in many instances we see loans declined by brokers, who are referred to us and we are able to close quickly.
Mortgage Bankers (aka Mortgage Lenders)
Mortgage bankers, on the other hand, lend their own money. As such, they typically have more control over the speed at which your loan moves and can make more exceptions to guidelines.
Every bank is different and their risk appetite can vary widely from year to year, but it’s important for you to understand the distinction between a mortgage broker and a mortgage banker.
How Do Brokers and Bankers Get Paid?
Both banker and broker are paid a flat fee, percentage, or salary for originating loans. The Dodd Frank Act and aspecific provision contained within the act, called the Loan Officer Compensation Rule, legally require mortgage originators to be paid the same way on every loan.
Click here if you want to learn more about the Loan Officer Compensation Rule.
Both bankers and brokers are covered under the act and, as such, do not have the ability to steer you towards a loan program that would financially benefit them more than another. Most loan originators today are paid between .3% and 1% of the loan amount, depending on what company they work for, if they have a base salary, and what part of the country they originate loans in.
Loan officers in Kentucky who average $60,000 loans are going to be paid a higher percentage per loan than loan officers in California that average $600,000 per loan.
Think about that for a minute. Most mortgage lenders are paid one tenth to one third the amount Realtors are paid on the same transaction. This means that there is not that much profit in the mortgage origination business these days.
The important thing for you to understand is that a loan officer cannot charge you a higher rate or push you towards one loan program over another in order to make a higher commission. They are paid the same way on every loan regardless of the loan characteristics.
Why are there cost differences between mortgage bankers?
There are more expenses to originate a loan than just paying the loan officer commission. There is significant legal and regulatory overhead, hourly wages to pay processors, underwriters, disclosure teams, closing document and wire teams, lots of human capital at work to get a loan closed seamlessly and quickly.
And that is where the cost differences in mortgages really come in to play. As a mortgage banker, I have to make a decision on what type of mortgage operation I want to run. The question I have to ask myself is, “what kind of experience do I want to build for my clients, what will I be proud of?”
If I’m a mortgage lender that sees value in low rates and fees alone, then I pay employees poorly, don’t invest in technology upgrades to improve communication and the client experience, and I set rates low to attract rate shoppers (not as low as the client experience in some cases).
If I’m a mortgage lender that sees value in convenience, flexibility, common sense underwriting, speed, investing in technology and the absolute best employees we can hire to take care of our clients, then our rates cannot be as low. It’s not economically viable.
Take Home on Mortgage Lenders
My advice to clients is to consider the rates, but also dig deeper and review the online reviews of each institution, look for testimonials from past physician clients, and even ask to speak with a few of their past clients if you are feeling in your gut something might be off.
That might seem like a lot of work. However, it’s much less work than having your closing delayed for weeks, having your belongings sit in a pod and living out of a hotel as the bank tries to figure out how to close your complicated loan.
I hope you found this article interesting and worth your time. Feel free to send me your questions or comments. I’d love to hear them.
We appreciate the quality of work that Josh has done for our clients over the years. We trust him with our personal loans, and he trust us with his local real estate transactions.
To his point, we have some extra info on trying to find a home on your own and the true cost!
Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.