Process of getting your mortgage

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.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, 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 also when the lock expires.