Selecting a Mortgage Broker This Is A Member-Only Page Invest Web Homepage Should You Use One?
To use or not to use a broker, that is the question. Why and when should you consider using a mortgage broker? Why not go to your local bank where you have been a customer for years? If you use a mortgage broker, should you visit the zillion-and-one mortgage Web sites now in operation, answer one of those e-mail solicitations you've received from lenders, or reply to some of the many newspaper ads?
These are all alternatives and under various circumstances one or the other, and sometimes a combination, will be the best way to find a loan.
1. Do you want an "80% N/O/O Cash Out 1-4 Family FIV"?
2. How about an "80% NIV -- Purchase or Refinance; No Asset"?
3. Or do you have no idea what these words and numbers mean when seen in an advertisement?
For the majority of borrowers item 3 applies. That's one of the reasons why more borrowers than ever are going to mortgage brokers when looking for loans. With a broker, they can shop among many, even hundreds, of mortgages with cryptic descriptions such as those listed to find one that best fits.
Consumers and lenders alike have long lamented the complexity of mortgage transactions. The paperwork involved ties up a lot of time and the whole transaction can fall apart if everything doesn't come together by closing.
At the same time, life can be even tougher for customers who want someone they can reach on the phone quickly or who need specialized purchase or refinancing assistance.
That's why brokers can be a big help -- and part of the reason why they've become more popular over the past decade. A 1999 study estimated that the number of independent mortgage brokerages was about 36,000 at the end of 1998, up from 7,000 in 1987, just 11 years earlier. Those brokers, in turn, handled 70 percent of the estimated $1.7 trillion worth of mortgages originated in 1998, up from 20 percent of loans originated in 1987.
What's the attraction? Brokers get money from wholesale lenders, add some dollars as compensation for their work, and "sell" it to borrowers in much the same way that Best Buy purchases refrigerators from General Electric, marks them up, and sells them to shoppers. Because brokers can choose from many wholesale lenders who, in turn, have several specialized programs each, they can often find mortgages that closely match particular needs. And, the cost is usually only nominally, if at all, higher.
For example, suppose someone wanted to get a loan to buy a home for 80 percent (80%) of the property's value, but didn't want to verify employment income (NIV) or brokerage and bank account assets (No Asset). Then consider that there is another person who wants to refinance the mortgage on an existing duplex he owns and make it larger to get some equity out as cash (Cash Out). The loan in this second case is against a house that isn't the primary residence (N/O/O, or not owner-occupied), but the borrower doesn't mind fully verifying income (FIV).
A bank would not likely be willing to make the loan for either of these cases. For the first case, it's because the bank couldn't determine whether or not the first person would be able to pay that loan back and for the second case because it's because the bank might be afraid to allow the second borrower to take out a larger loan against a rental property because those mortgages are considered riskier. But a broker would know of lenders that had no problem with waiving those requirements. As a result, both deals would likely get done.
If either of the two hypothetical borrowers went to a local bank, they would be offered that bank's relatively few fairly restrictive programs and that's it. If they go to a competent mortgage broker, they will be offered a whole array of different institutions' products. Because of the many different types of loan programs offered by many different lenders, each individual is going to find one that fits.
Borrowers looking for construction/permanent hybrid mortgages or those with credit problems make good candidates for the services of mortgage brokers. The same holds true for people who want to purchase second homes or rental property, as well as current mortgage holders who want to refinance in order to take some equity out as cash at high loan-to-value ratios.
Shopping with a broker means accepting the fact that a local lender isn't standing behind your mortgage. In most cases, the broker doesn't even technically originate and fund the loan; the wholesale lender does. That lender may sell the loan to a separate company that services mortgages by collecting payments and performing other tasks, and that company may, in turn, sell it again. However, banks and thrifts also do this, although some are portfolio lenders that keep some of the mortgages that they originate on their books.
Banks sometimes cut deals with people who have done a lot of business with them, too, so there are benefits to going to one for a loan if your need fits one of their few standard molds.
In a way, there are two kinds of entities out there: (1) loan officers who offer the limited range of products offered by their bank and (2) mortgage brokers who offer products of multiple lenders and/ or even other mortgage brokers.
The principal advantage of the loan officer for the borrower is that he may have a recognizable identity for the borrower and the main benefit to the loan officer is that the borrower may offer a previous long-term relationship with the bank.
The advantage of the mortgage broker is that he has contacts with dozens of lenders. That puts him in a position to search a large market for the best deal. He's also in a position to get loans in market niches that single lenders might not cover. But the weakness of a mortgage broker is that there's usually no identity. People go to mortgage brokers at their hazard if they don't know the important factors about selecting one in the first place as well as have at least a basic understanding of the market.
There are things that must be considered whether a consumer chooses a conventional lender, an individual broker, or a mortgage company Web site. The borrower should know the various types of products available, especially if it's a niche loan that's more complicated than a standard 30-year fixed mortgage. After selecting a mortgage type, the borrower must carefully compare the rates, points, and other costs for several different lenders.
The bottom line is that you can do a lot better at a mortgage broker, but you can also do a lot worse. What you must remember, even if you have a complicated situation, is that you need to shop. Mortgage Broker Regulation
Before even worrying about selecting a mortgage broker, you should determine the degree of regulation in your state. Knowing this will determine how you much care you must put into making the selection and will influence how you do it.
Unlike banks or thrifts, mortgage brokers aren't directly regulated by any federal agency. Because it doesn't take much to get into the business, the number of brokers out there has soared in recent years, as mentioned earlier. That means plenty of incompetent or just plain unscrupulous people are out there looking for business.
Regulation of mortgage brokers is not very extensive compared to the regulation of real estate agents. In many states, the regulation is weak. Some states do not regulate mortgage brokers at all. Unfortunately, many brokers are involved in a lot of questionable practices. There are all kinds of opportunities for unscrupulous mortgage brokers to rip off customers who are poorly informed and don't understand what it is that they are buying.
The degree of state regulation of mortgage brokers varies greatly among the states. Some states have no educational or professional requirements to become a broker, while others mandate that potential brokers attend mortgage classes, pass written tests proving their competence, and some even require working in the field for a licensed broker for a year or two, serving an apprenticeship. To the degree that your state regulates mortgage brokers, this regulation will provide an equivalent degree of protection. You will need to be a lot more careful selecting a broker in a state that has no regulation compared to a state in which they are highly regulated. Selecting A Broker
It's good to have a broker who's nice, but it's better to have an ethical and competent broker who will get the type of loan you need with rates and costs that are competitive.
The worst way to choose a broker would be to choose one at random from the yellow pages, from a newspaper ad, or from an add on Web or in your e-mail. Not only is there a chance you might even pick an unlicensed broker, but it is relatively easy for anyone to obtain a mortgage broker license in all but the most highly regulated states. Mortgage brokers are cranked out at high rates in this country, maybe not as fast as real estate agents or lawyers, but the numbers are increasing rapidly. Additionally, most seasoned professionals are not likely to get caught up in the "mine is bigger than yours" yellow pages ad contest. The pro makes their money by who and what they know and by referral from satisfied customers, not by an ostentatious show.
The best way to select a mortgage broker is the same as the best way to select a dentist, lawyer, veterinarian, or real estate agent; by having personal knowledge of the individuals and of their abilities and experience. The next best way is to get a referral from a trusted acquaintance who has the personal knowledge. A significant percent of the people are getting their loans through a broker today. That means that a lot of your acquaintances have worked with a broker.
If the above isn't feasible, for example because you are new to the area, the alternative is to do some research on your own.
Determine who is brokering a lot of loans in your area. There are a number of ways to do this including: reading advertising and newspaper articles and talking with real estate agents, lawyers and CPAs. Select two or three apparently successful individuals or firms in the area. Interview the head man at each firm, as well as associates to whom you might be assigned, and make your selection of the candidates based on the interviews and the agreement that they want you to sign, if any.
If the broker requires an employment agreement, you should be sure that you understand the commitment that you are making. It is probably reasonable that you agree to utilize only that particular broker. After all, it wouldn't be fair if the broker spends many hours on your behalf and you then get your loan through another broker. However, the commitment should have a reasonable time frame, maybe 30 or 60 days, and should not obligate you to paying a fee unless you close the loan. It is only fair, however, that you would be obligated to paying his fee if you get the same loan from another broker that he has presented to you.
If you feel particularly brave and consider mortgage brokers on the Web, you need to consider other matters. A Web site business is seen everywhere. The site of a broker in a state that is completely unregulated can be seen in states that highly regulate mortgage brokers. Do not use a broker who does not meet the licensing laws and other regulations of the state in which your property is located. If the broker does not have a physical location in the area of your property, it is even more important to check him out.
No matter how you find broker candidates, you should check with the licensing agency in your state if it is a state that regulates mortgage brokers. Are the company and its associates properly licensed? Have any complaints been filed against either? Has the mortgage brokerage firms or individual brokers that you are considering ever faced state regulatory sanctions in the past. Most states maintain some kind of list of individuals and companies who have been fined or had their licenses revoked. Check them out via a phone call to the state's mortgage broker license regulatory agency or on the agency's Web site. Even if it's a state that does not regulate mortgage brokers per se, try to check them out with the BBB and by other means.
For each broker that survives your investigation, find out if you will be asked to sign a contract regarding their services. If possible, avoid signing an exclusive contract that will require you to compensate the broker even though you do not go with any of the loans/lenders that he presents to you. It would be fair to sign a contract providing for his compensation if you take the exact loan/lender that he first presented to you even if you get it from another broker or without a broker, but be sure that the contract specifically allows this. In any case, if you expect to also look for loans on your own or to even to use an additional broker, be sure to that you institute a procedure for verifying where you first got the lead. What to do after you select the broker
So now you have a mortgage broker who (1) lives and maintains an office within 2 miles of your property, (2) was highly recommended by several different acquaintances who personally utilized his services, (3) is duly licensed in your state and has an impeccable record with your state's regulating agency, and (4) you find from your preliminary interview that you like his personality - what next. Review possible programs
Once he knows your property, your financial circumstances, and various other things about your loan requirements, the broker should be able to narrow things down a few possible loan types. Get descriptions in writing of the exact programs being offered. Because many people who go to brokers are getting specialized mortgages that may not be as straightforward as 30-year fixed-rate loans, it's especially important to know what you want and know if that's what you're being offered. That way, you can compare rates, fees, and points on an apples-to-apples basis. Fully understand the program best suited to your needs
Once the specific program that fits you has been chosen, make sure that you know what information and documentation will be required for your application as well as what qualifying criteria will be used. Be sure the requirements are acceptable for your circumstances and desires.
Ask your broker what his total compensation will be and who is paying what. Brokers are sometimes paid by both the lenders who underwrite the mortgages and the borrowers who get them. While there is nothing inherently wrong in this, you should know in advance what the compensation will be and feel comfortable about it.
Get a detailed good-faith estimate of all costs and determine that these costs seem reasonable and in line with what you expected based on previous discussions with your broker. Costs may include credit report cost, appraisal fee, points and other loan fees, title insurance premium, and, of course, the mortgage brokerage fee. There may also be other expenditures that are actually pre-paid expenses rather than a cost of the loan itself. Included in this category are pre-paid interest, hazard insurance premium, property tax, or impound deposit.
Rate locks from a broker can be a problem if you're not careful. Keep in mind that a lock usually has to take place during business hours for the lock to be effective that day. Communication problems can delay the transaction and leave you with a higher rate if rates go up over night. If you do a lock, get written proof that the lock has been properly executed.
Pre-Closing & Closing
If at all possible, obtain blank copies of the documentation that you will be signing. You will usually be expected to execute documents at a relatively short meeting scheduled for that purpose. You may be under pressure to sign everything without time to carefully read and understand what you are signing. Lenders are not always willing to cooperate in this issue, so if you could not see copies of documentation before the signing meeting, be sure to take as much time as you need in order to feel that you fully understand and approve of the terms.
You should also obtain a final statement prior to executing documents. Check this pre-closing statement against any previously received estimate and other understandings.
- Check that the broker's compensation is as was understood.
- Check that all other costs are as expected
- Check any pro-ration calculations
As soon as possible after closing, check the final statement against the pre-closing version. Invest Web Homepage |