How to know when to use a mortgage broker
September 30, 2009 · Tagged with Loans
This is fine as far as it goes, as long as the rate and costs are better than what you could get yourself (go ahead and check with the bank). The problems in recent years, however, came when banks offered more money to brokers who pushed certain loans or terms, say loans with interest rates that rose quickly and imposed penalties if the borrower refinanced within a few years.
“The ways brokers were paid created a conflict of interest and really meant that the broker to a very large extent was financially rewarded by betraying the trust of the borrower,” said Representative Brad Miller, a Democrat from North Carolina who co-sponsored the legislation in the House of Representatives.
Though many of the worst loans don’t exist anymore, it’s still worth asking mortgage brokers point blank whether their yield-spread premium — the industry term for the money they earn from lenders — could be lower if you were in a different type of loan. And if you don’t understand the answer, run it by an accountant or a more sophisticated friend whose compensation does not depend on the answer.
Working with a member of the Upfront Mortgage Brokers Association may help, since they’ve agreed to outline the sources and size of their compensation at the beginning of the process.
The Guarantees
If you’re comfortable with the answers so far, you’ve probably found a good match. There are plenty of mortgage brokers out there who earn their keep, and the best of them know much more about home loans than a bank officer will ever forget. Still, I’d test them with two more questions.
First, ask if they’ll guarantee the rate and costs in the good faith estimate they give you when you apply with a lender. “Good faith estimates are nothing but a sham,” said Mr. Stoffer, who has tried to fix what he sees as an industrywide problem by sticking to his own projections on the costs of the loan. “If I’m wrong on my good faith estimate, then I pay you. We should all have something binding upfront so people can shop.”
Second, ask if they’ll sign a piece of paper agreeing to work solely in your best interest. The legal word for this is “fiduciary, and Senator Charles E. Schumer has been trying to force this standard upon mortgage brokers for a couple of years. Representative Miller agreed that this would be ideal but that it was probably not politically realistic.
Maybe it isn’t. But that shouldn’t stop you from trying to hold your own broker to a higher standard.