In-house mortgage financing: pros and cons

Updated by Craig Berry

Homebuyers work closely with both a mortgage lender and a real estate agent to make sure they find the right house and get the proper financing. Realtorsoften develop relationships with lenders so they can recommend a professional who they trust to provide excellent financial service to their customers. Some real estate companies go a step further and develop an in-house lending program or an affiliation with a mortgage lender in order to generate more revenue and have greater control over the financing process.

There are both advantages and disadvantages to working with an in-house lender, so homebuyers should always compare offers from multiple lenders before committing to a lender or a loan.

Advantages of in-house mortgage financing

Steve Adamo, president of Weichert Financial Services in Morris Plains, N.J., a division of Weichert Realtors, says that consumers prefer one-stop shopping for a home and a loan.

"We put local lenders in our real estate offices so they can have face-to-face meetings with buyers," says Adamo. "The big advantage to buyers is that the lender and the buyer and the Realtor are in constant, coordinated communication."

Buying a house involves working closely with a mortgage lender and real estate professional to make sure you find the right home and the best possible financing. Realtors often develop relationships with lenders so they can recommend a professional they trust to provide excellent financial services.

Some real estate companies go a step further and develop an "in-house" mortgage financing relationships with lenders. Others may even cultivate an affiliation with a specific mortgage lender in order to generate more revenue and have greater control over the financing process. The extent of these relationships can vary according to state laws.

There are both advantages and disadvantages to working with an in-house lender for your mortgage loan. Home buyers should always compare offers from multiple lenders before committing to an in-house bank mortgage or other mortgage loan.

How does in-house financing work?

An in-house lender is generally someone who sits in the real estate agent's office to field questions and offer loan programs and advice to agents' clients.

Steve Adamo, president of Weichert Financial Services in Morris Plains, N.J. a division of Weichart Realtors, says consumers sometimes prefer one-stop shopping when it comes to buying and financing a home.

"We put local lenders in our real estate agent offices so they can have face-to-face meetings with buyers," says Adamo. "The big advantage to buyers is that the lender and the buyer and the realtor are in constant, coordinated conversation." Some buyers like the concept of communicating with one party, knowing their lender will update all other parties involved. Other advantages may include:

• Possible closing cost incentives or builder upgrades offered by using an in-house lender
• Constant communication between your lender and agent
• Ability to meet new condo community loan requirements, as they may not meet Fannie Mae, Freddie Mac nor FHA guidelines

In-house financing disadvantages

An inaccurate assumption is that in-house financing requirements are less stringent, and result in a smoother and faster loan process than with other lenders.

The implied sense of control over the loan is typically just that -- implied. In-house lenders go through the same steps from application, to underwriting to closing.

Suzanne Schakett, senior vice president at Envoy Mortgage in Houston, says homebuyers may want to think twice before working with an in-house lender. "In-house lenders have a good amount of volume and a different compensation structure because business comes to them directly. Sometimes they don't 'roll up their sleeves' to work really hard with someone who needs to explain a period of unemployment or perhaps has a credit ding as a result of a divorce."

Some in-house bank mortgage companies may feel they have your business "in the bag," and as a result, may not be as hungry for your business. This feeling of having no competition for your business, along with the possible lack of skillset, may result in you failing to get the best loan type, mortgage rate and closing costs.

Another important factor when it comes to using in-house lenders that has caused the real estate and lending industry to change its game is the recent clampdown by the Consumer Federal Protection Bureau (CFPB).

The CFPB has been cracking down on realtor/lender relationships for violating the Real Estate Settlement Procedures Act (RESPA). In addition to its investigation into Zillow for possible violations, just last year the CFPB slapped Prospect Mortgage with a $3.5 million fine for violating RESPA.

Always compare mortgage rates

Regardless of the offers from an in-house or preferred lender, it's always smart to shop and compare mortgage rates from more than one company. You may end up finding that the in-house lender is the best fit, with the best fees and the best rates. You may also find, however, that a better mortgage loan exists for your situation.

Don't worry too much about having multiple inquiries potentially harm your credit score. Typically, over a short period of time, multiple credit searches are treated as a single inquiry. This means shopping around should have very little impact on your credit score. In fact, according to myFICO, one inquiry should take less than five points off your FICO score. The general rule of thumb is as long as the shopping occurs within 14-45 days, all inquiries count as just one.

A mortgage is generally for a lengthy time-period, so it is important to do your research to find the best possible home loan.