Home loans are available from a number of institutions, from banks and credit unions to mortgage lenders and brokers. Within a few miles of almost everyone in the U.S., there is a terrific mortgage professional working for a trustworthy company. That is not to say that all lenders and brokers are trustworthy: The newspapers are filled with story after story of companies taking advantage of homebuyers to the tune of billions of dollars. But don’t worry, by following the helpful advice outlined here, you will be able to find the best mortgage brokers or lenders. As a first step, you should make sure you know the difference between a mortgage lender and a broker.
What Is a Mortgage Broker?
A broker works on a customer’s behalf with several banks in order to find the best mortgage lender for their needs. A broker is different from a loan officer, who acts as an intermediary between an institution and a borrower, and is generally licensed and regulated to work in the financial sector. Mortgage brokers get paid by charging origination and/or broker fees, which are due at the time of closing.
Among the advantages of working with a mortgage broker is that they can do the comparison shopping for you, saving you time (and perhaps money). Rather than spending hours applying for six different types of loans, the broker can dig around to find the best rates for your situation. Though some major banks do not work with brokers, it isn’t uncommon to find one affiliated with a local branch who has access to a wide range of loan products.
It’s important to note that brokers do not approve the loan themselves; they find a lender who will approve the loan. The broker then adds his fee to the wholesale rate, and in the end the borrower should get a rate that is about equal to the selected lender’s retail rate. Remember, there is always the chance you could find a better deal on your own, so by no means should you feel obligated to work with a mortgage broker.
If you do decide to meet with a mortgage broker, it’s wise to know where your credit stands so you have a sense of what types of loan for which you may qualify. (You can pull your free credit report summary, updated every 14 days, on Credit.com. The snapshot provides two free credit scores, plus tips on how to improve your scores.)
What Is a Mortgage Lender?
Mortgage lenders specialize in making mortgage loans, and many, though not all, are associated with banks. Mortgage lenders typically deal with borrowers through one of their retail banking branches or through a mortgage broker.
Most mortgage lenders also have retail and wholesale divisions. Retail divisions offer loans to borrowers through bank branches or local offices. Wholesale divisions, meanwhile, offer loans through mortgage brokers. Wholesale mortgage interest rates offered to brokers are lower than the retail rates offered to the general public. Loan programs and qualifying standards will vary from one lender to the next, so it can be challenging for a homebuyer to shop around among many lenders.
Should I Use a Mortgage Broker or Lender?
Ultimately, the decision comes down your preferences and whether you feel you’ll save time by using a mortgage broker. If you feel you can do the research on your own, then you may prefer to work directly with a lender.
In today’s market, it’s not always entirely clear if you are working with a mortgage lender or a broker. Don’t be afraid to ask your mortgage company if they act as a lender or as a broker. Regardless of which type of institution you deal with, it is important to find an individual loan officer or broker that you are happy with and can trust.
How to Avoid Mortgage Scams
Like the stock market, the mortgage market is fluid and rates change daily. Getting rates from one lender one day and another the next could show disparities that are a product of the marketplace rather than differences between lenders.
Some lenders even advertise rates that are not real. You may see such rates in internet ads and unsolicited e-mails. You’re better off ignoring most of these. It’s a good idea to choose your lender, not let them choose you. And be sure you choose carefully. Some of the loan representatives that you are likely to talk with may not be trustworthy. If given the chance, they may make choices that benefit themselves or their employer rather than you.
Part of the problem is that disclosure laws designed to protect consumers are sometimes not enforced. Take the Good Faith Estimate of Closing Costs that your lender is required to give you within three days of application. Let’s say you read yours, and it says that the lender will make 1 point (1% of the loan amount) as a Loan Origination Fee, and an additional $1,000 in other fees. The form also discloses fees that are beyond the lender’s direct control, such as settlement fee and title insurance fees, your first-year home insurance premium and County recording fees.
You think it looks pretty good because the estimate is slightly lower than what you believe other lenders are charging. But the lender is not bound by that estimate. He can change it at will, deciding, perhaps, to charge you 2 points instead of one, doubling his income.
When you finally see the loan documents at closing, you may find out that you are being cheated, but what can you do? Everyone may expect you to close, and it’s unlikely they will be sympathetic if you say, “I need another 30 days to get another loan.”
The bottom line is that when something like this happens, you are purposely misled from the beginning, kept in the dark through the process and shielded from viewing documents until the last moment, at which point it feels too late for you to do much about it.
So how do you avoid this terrible situation? The answer is that you have to ask questions designed to tell you what kind of person and institution you are dealing with.
How to Find a Trustworthy Mortgage Professional
If you could listen in on 100 phone conversations between borrowers and prospective lenders, you’d find that the most common questions are:
- “What are your rates?”
- “What are your points?”
- “What are your fees?”
Some loan representatives may lie to phone shoppers about rates in order to lure them in. Second, upfront costs probably should not be your main concern. Your goal is to get trustworthy answers about loan choices and interest rates. That can’t be done with phone calls to strangers. I’d be surprised if one person in 100 even asked, “How do I know I can trust you?” Yet this is the most important question of all.
So how can you find out if your trust is well placed? Begin with referrals, and then make sure you ask the right questions. Get referrals from friends who have recently gotten loans. Ask these friends about how well they were treated. Ask the following questions:
- Did the lender describe the available loans in easily understood language?
- Did he/she lock in the rate that was promised?
- Were there any hidden or unexpected fees that were not fully disclosed in the initial meeting?If they still have the documents, see if the fees on the loan documents were the same as were originally disclosed on that initial Good Faith Estimate.
- Was the broker or banker responsive and able to deal with problems quickly?
Get referrals from real estate agents. Experienced agents can refer you to lenders they’ve worked with in the past. But don’t simply take the agent’s word as gold. Be sure to ask the same questions you’d ask if you were finding the lender on your own. When you speak with a lender, ask questions about their experience. Use the following list of questions to help you decide if you are satisfied with a lender’s knowledge, experience, professionalism, integrity and commitment to service.
8 Questions to Ask Potential Lenders
- Can you give me the HUD-1 closing statement on the last three deals you completed?
- What are your loan programs? Do you offer VA loans, for example?
- Can I see a Good Faith Estimate right away?
- Could you estimate closing costs for my loan?
- Can you estimate and explain your fees?
- How and when will you earn your income from this loan?
- Will you get approval for my loan locally?
- Are you certain you can get this done in time for closing?
3 Questions to Ask Potential Brokers
- How do you get paid, in points or commission?
- How much will you make on this loan from the lender?
- Name some of your top lenders.
By following these simple steps, you can develop a trusting relationship with your lender and move forward with confidence.