More than half of mortgage borrowers get their loans through
brokers. The main advantage of using a broker, instead of going through
a bank, is that the broker can shop among various lenders to find the
best deal. Many mortgage brokerages are small businesses. Borrowers
often feel, whether justified or not, that they can trust big-name
lenders such as Wells Fargo, Washington Mutual and Citigroup, but they
often don't feel as confident about small-name brokers with lesser
advertising budgets. If that describes you, here are four questions to
ask a mortgage broker whom you're thinking of dealing with:
Can I get references?
Ideally, you found the broker through a reference from a friend,
relative or co-worker. But if you selected a broker through another
criterion -- maybe you drove past the broker's office every day, or you
responded to a direct-mail advertisement -- you can request references.
Ask for the names and contact information for the most recent two or
three customers who closed their loans. Then follow up by calling them.
Ask if they were treated fairly and if the broker's good faith estimate
of closing costs was accurate. Above all, ask if they would do business
with the broker again. You might find yourself talking to a borrower who
already is a repeat customer -- someone who got the original mortgage
through the broker, then refinanced through the same broker. That's a
good thing.
How long have you been in business?
"I get asked that more than others," says Ray Champion,
president of Pro Mortgage Corp. in Dallas. "I guess people want
someone who's been doing it for a while." How long is long enough?
Even a newbie to the mortgage business can give good service, but if
you're looking for someone who didn't jump in to surf the current
refinancing wave -- in other words, someone who had a career in the
mortgage industry in slow times as well as in today's frenzied times --
choose a broker who has been doing home loans for at least three years.
Preferably more. Thousands of mortgage brokers have jumped into the
business since the refinancing boom began in early 2001. Many of them
won't be around when the refi boom ends. Your broker is more likely to
stick around if he or she was brokering home loans back in the
relatively lethargic days of 1999 and 2000.
How are you compensated?
Mortgage brokers get paid two main ways: fees and yield spread
premiums. The broker's fee often comes in the form of points, in which
one point equals 1 percent of the loan amount. On the loan documents,
you might find it listed as the lender's origination fee or mortgage
broker commission. You also might find application, funding, processing,
document preparation and other fees. The yield spread premium is a
controversial way to compensate brokers. Here's how it works: Let's say
you qualify for a loan at 6 percent interest. The broker persuades you
to take a loan at 7.5 percent. The lender pays the broker several
thousand dollars for signing you up for the higher-rate loan. That
payment is a yield spread premium. Theoretically, yield spread premiums
aren't necessarily harmful to borrowers. If you don't have the money to
pay closing costs, the broker can get you a loan at a slightly higher
rate and apply the yield spread premium toward closing costs. Banks do
the same sort of thing -- underwrite no-cost loans for slightly higher
rates than borrowers otherwise would qualify to pay. A study published
in 2002 by Harvard Law professor Howell E. Jackson concluded that yield
spread premiums "are not a good deal for borrowers, but serve
primarily to increase compensation paid to mortgage brokers."
Jackson conducted his research while preparing to serve as an expert
witness on behalf of borrowers who were suing a bank that gave yield
spread premiums to brokers. When you get your good-faith estimate of
closing costs, and later when you get your HUD-1 statement of final
closing costs, scrutinize the items in the 800 section, near the top of
Page 1. Ask the broker to explain the numbers. Any yield spread premium
should be listed there, possibly with the notation that it's "paid
outside of closing" or "POC."
What is your process for locking Interest Rates?
Some brokers gamble with rate locks. You tell the broker to lock a
certain rate on a certain date, and the broker tells you over the phone
that your rate is locked. Secretly, the broker doesn't lock the rate,
hoping that rates will drop before your closing day. If rates drop --
even if they dip for just a day -- the broker can lock at that lower
rate. You pay the higher rate that you locked at. The broker can make a
little profit on the difference. If rates don't drop, and instead they
rise, the broker might tell you that there was a glitch in your
paperwork, or that the loan process was otherwise delayed, and that it's
impossible to close your loan before your rate lock expires. Or the
broker might tell you that you are mistaken, and that you never really
did lock your rate. The safest way to go is to ask your broker for a
loan commitment letter from the lender. It should have the lender's name
and specify the interest rate, the date the rate was locked, and when
the lock expires.
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