Mortgage brokers are taking a lot of heat over lending practices that helped bring on the credit crisis and ultimately the current economic situation. So can you trust mortgage brokers?
The mortgage broker industry has gotten a bad reputation lately. Many buyers prefer to go directly to a lender to avoid dealing with mortgage brokers.
Here’s a story that illustrates some of the practices that are damaging mortgage brokers’ reputations. Brian had little money for a down payment and barely enough income to qualify for the house Brian was interested in. He went to his bank to ask for a loan, but was told he didn’t qualify because his debt to income ratio would be too high.
Brian heard from a friend that Sky High Lending would be able to get him a loan. Brian went to Sky High Lending and met a broker there. The broker told Brian he would be able to get him a loan to buy the house he wanted.
Brian was thrilled. He was going to get the house he really wanted. He didn’t want to ask the mortgage broker too many questions as long as he could buy his house.
The mortgage broker told Brian that he wouldn’t have to pay any broker fees, they would be paid by the lender. Brian thought that was great since he didn’t have much money to pay closing costs.
What Brian didn’t know was that the mortgage broker went to the lender that would pay him the highest fees, not the lender that had the best loan for Brian.
The lender paid the broker a Yield Spread Premium of $2500 for getting Brian to agree to pay a 0.5% higher interest rate than the market rate. Brian could have gotten the market rate if he had gone directly to the same lender.
The mortgage broker got Brian an option ARM loan so Brian could afford to make the interest only payments. Brian also had options to pay more or less each month. The mortgage also had a balloon payment due in 3 years.
The broker suggested that Brian refinance his house in two years to avoid making the balloon payment. He told Brian that by then the appreciation should bring him enough equity to get a better loan.
The mortgage broker also hoped to get paid more fees in two years when Brian came back to refinance. He knew Brian would have to refinance or lose his home when the balloon payment came due.
He also knew that with the option of paying less each month Brian would probably not have enough equity built up to qualify for a better loan, so he would refinance into another similar loan that would need refinancing in another two years. Should Brian have trusted this mortgage broker?
Many of the things used by Brian’s mortgage broker, while not necessarily illegal, are ethically questionable. Many mortgage brokers do not use such questionable practices.
Ronald Reagan, when dealing with the Russians over strategic arms limitations, often used the phrase “trust, but verify”. This is a good policy to follow in many situations, especially when buying a home.
A home purchase is one of the biggest financial decisions you will make in your life, and you don’t want to learn from first hand experience what mistakes to avoid.
The best way to “trust, but verify” in the case of a mortgage broker, a real estate agent, or any other person involved in the transaction is to arm yourself ahead of time with knowledge.
Learn what standard mortgage practices are, and what the terms used mean before you sign any documents. Learn what to watch out for and what to expect. Here are some things to watch out for:
- Flipping – frequently refinancing into new loans with little or no benefit to the borrower.
- Packing – adding additional fees and products into the cost of the loan
- Charging excessive fees.
- Loan terms or structures that make it difficult or impossible to reduce or repay the principal of a loan.
- Inadequate disclosure of fees and costs
- Mandatory arbitration clauses
- Single premium credit life insurance
While there is much to beware of, not all mortgage brokers should be mistrusted. Just be sure to verify that the loan and terms they provide are in your best interests.
To get the best home loan you should shop around and compare several brokers or lenders. A mortgage—whether it’s a home purchase, a refinancing, or a home equity loan—is a product, just like a car, so
the price and terms may be negotiable.
You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars.
A mortgage broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but
they are not obligated to find the best deal for you unless they have contracted with you to act as your agent.
Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.
Mortgage brokers are usually paid a fee in the form of an increased interest rate, or “points” paid at closing or a combination of the two. Ask each broker you contact how he or she will be paid, so you can compare the different fees.
It doesn’t hurt to ask brokers if they can give you a better deal than the original terms they quoted or than those given by another broker.
To find out more about getting a loan to purchase your home visit the “Get A Loan” page.