Mortgage brokers have gotten a bad rap in the last year. Unfortunately, many unscrupulous brokers steered borrowers into expensive loans with large kickbacks and helped fuel the current crisis by failing to properly disclose all information. Fortunately, most of them are now out of business. The brokers who remain are usually reputable people who are interested in helping borrowers find appropriate and affordable loans.
Why Should You Use a Mortgage Broker?
A mortgage broker has much more experience and knowledge than you could ever hope to. A good broker will:
- Have a better understanding of your needs
- Have a better understanding of your mortgage options
- Have a better understanding of the current market
- Explain all loan elements, options, and fees
- Have access to a wider selection of loan products.
Mortgage brokers have access to loans from wholesalers, which means they may be able to get a better rate than you would receive from a traditional bank.
Cons of a Mortgage Broker
There are reasons to use a local bank instead of a mortgage broker, however. The primary reason to avoid brokers is the Yield Spread Premium. This is a bonus paid to the broker by your lender after the loan closes. The fee may be paid in addition to any other fees you pay the broker directly. The YSP has led some brokers to recommend loans with higher rates or worse terms than the borrower actually qualifies for.
With the collapse of the housing market, most of these brokers have been forced out of business, but the YSP is still a concern. On the other hand, if the broker got you a lower rate than your bank offered, the YSP may not be a concern.
How to Find a Mortgage Broker
Just a year ago, you probably heard and saw ads for brokers all over the radio and TV. Now that most of those players are out of the way, you have to work a little harder to find a broker, but that’s not necessarily a bad thing. Here are the top three ways to find a broker:
Referrals from friends
ask your friends who they used. If they weren’t happy with the broker, they wouldn’t offer the recommendation.
Referrals from real estate agents
most agents work with brokers, so your agent probably already has a list handy.
just search for a broker in your area or one of the larger online mortgage brokers like Lending Tree. (This is not an endorsement.)
Questions to Ask a Broker
Before you hire a mortgage broker, ask the following questions to be sure you’re working with a licensed, reputable broker:
- How many years of experience do you have?
- What is your license number?
- How are you paid? Do you receive a YSP?
- How long does funding usually take?
- Will you guarantee your good-faith estimate?
- Do you fund your own loans? (It’s okay if they don’t, but it’s important to know whether they’re actually a broker or are a direct lender.)
Once you’ve told the broker about your specific financial situation, including credit scores, salary, etc., ask the following questions about any loan offers the broker produces:
- Which loan is best for me?
- What is the APR?
- Is the rate fixed or adjustable?
- If it’s adjustable, what are the terms of adjustment? What’s the most my payment could be after the first adjustment?
- What are the points and fees?
- What are all the costs?
Comparing Costs and Offers
A mortgage broker will most likely return a couple loan options. Review them carefully, and then approach a couple of consumer lenders directly to see if you can get a better deal. Use Bankrate to find local lenders and mortgage rates.
You’re not obligated to use a mortgage broker even if they go through the process of approving a loan. You don’t want to scout too many brokers or banks because each pull on your credit report does reduce your score, but it’s worth your time and money to request three offers from three sources before making your final decision about a loan and a broker.