Also, if you think back to other services or products you’ve bought, you know the wisdom of considering the features and services you receive in addition to cost. Even if you find a low-cost loan from a lender with a reputation for great service, if the loan doesn’t meet your needs and personal situation, it’s not the best loan for you.
One of the first decisions you face in the loan-shopping process is deciding whether to shop on your own or to hire a mortgage broker to do the mortgage shopping for you.
Considerations when using mortgage brokers
What is a mortgage broker? Mortgage brokers are intermediaries, independent of banks or other financial institutions that have money to lend. What does a mortgage broker do? Mortgage brokers don’t have money to lend nor can they say yay or nay to your loan application. They do, however, originate, that is, process loan applications.Mortgage brokers will tell you that they can get you the best loan deal by shopping among many lenders. They may further argue that another benefit of using their services is that they can explain the multitude of loan choices, help you select a loan, and help you wade through the morass of paperwork required to get a loan. Some of the time, these assertions are accurate; but you need to know at what cost and how well these services are provided.
If your credit history and ability to qualify for a mortgage are marginal, a good mortgage broker can help polish your application and steer you to the few lenders that may offer you a loan. Brokers can also help if lenders don’t want to make loans on unusual properties that you’re interested in buying. For example, many lenders don’t like dealing with shared-ownership housing options such as mixed-use properties (residential/commercial), co-ops, and tenancies-in-common.
How mortgage brokers are paid
So how much do you pay a mortgage broker to get you a loan that meets your needs? Mortgage brokers typically receive a slice of the amount that you borrow — usually about 1 percent, although it may be as low as 0.5 percent on big loans and as much as 2 percent on small loans. (You may actually make an out-of-pocket payment directly to the broker.)Thus, if you’re going to use a mortgage broker, you must keep in mind that conflicts of interest are inherent, because such brokers are paid a commission just like stockbrokers and salespeople at car dealerships. For example, the more you borrow, the more the mortgage broker makes. Furthermore, some lenders pay higher commissions on certain loans (their more profitable ones, not surprisingly) to encourage mortgage brokers to push them. The actual lender may also pay the broker an additional fee if you pay a higher interest rate.
If you use a broker, make sure that all commissions, fees, and lender rebates are disclosed to you in writing before you commit to go forward with a specific loan.
Do mortgage brokers add to your costs?
Although mortgage brokers earn their living from commissions, that doesn’t necessarily mean that using a mortgage broker always adds to your costs of obtaining a loan. The interest rate and points for most mortgages obtained through a broker may well be the same as you’d pay if you had gotten the same loan from the same lender directly.Lenders reason that they can afford to share their normal fees with an outside mortgage broker who isn’t employed by the bank, because if you had gotten the loan directly from the bank, you would have had to work with and take up the time of one of the bank’s own mortgage employees.
Some lenders, including those with the lowest rates, don’t market through mortgage brokers. And sometimes a loan obtained through a mortgage broker can end up costing you more than if you had gotten it directly from the lender; for example, if the mortgage broker is taking a big commission or extra fees for himself.
If you’re on the fence about using a mortgage broker, take this simple test: If you’re the type of person who dreads shopping and waits until the last minute to buy a gift, a good mortgage broker can probably help you and save you money. A competent mortgage broker can be of greatest value to people who don’t bother shopping around for a good deal or folks who may be shunned, due to credit blemishes, by most lenders.
Even if you plan to shop on your own, talking to a mortgage broker may be worthwhile. At the very least, you can compare the mortgages you find with the deals the brokers say they can get for you. Be aware, though, that some brokers tell you only what you want to hear — that they can beat your best find. Later, you may discover that the broker isn’t able to deliver when the time comes.If you find a good deal on your own and want to check with a mortgage broker to see what he or she has to offer, you may be wise not to tell the broker the terms of the best deal you’ve found. If you do, more than a few brokers always come up with a mortgage that they say can beat it.
Some experts firmly believe that you will get your best terms only if each potential lender or mortgage broker knows that she has to give you the best combination of interest rate and points, without you telling her what loan terms her competitors offered you. If you tell the lender or mortgage broker what your best deal is, not surprisingly many will just barely beat that offer. Remember that one potential loan can outshine another in other ways — for example, maybe one lender is willing to give you a loan rate lock for 60 days at no cost.Questions to ask a mortgage lender
Whether you’re shopping for a mortgage broker or a lender, the following questions should come in handy:- What types of loans does the mortgage lender or broker specialize in? The right lender for you is one that understands and has lots of experience with the type of real estate property that you want to finance. For example, if you’re buying a co-op in a big city, a lender that focuses on lending to single-family home and condo owners in the surrounding suburbs likely won’t have the best programs and be able to deliver the mortgage you need on time.
This is a concern whether you’re talking with a mortgage lender or mortgage broker but comes up more often with brokers. In the quest to find the loan with the lowest possible interest rate, an inexperienced mortgage broker may end up trying to place your loan with a lender that doesn’t offer mortgages for the type of property you want to buy.
- How does the lender’s loan approval process work? Specifically, who’s involved in the approval, and where are these people located? The best lenders approve loans locally and don’t send your loan application to a mammoth, out-of-state, corporate headquarters where some faceless committee (or computer program) decides on the fate of your loan application.
Good lenders should roll up their sleeves to help you get loan approval, warn you in advance of possible problems, and suggest solutions that will help you get the best loan and terms possible. Robert has found that mortgage brokers with many years of experience are often your best option. For example, if you find a mortgage broker who was in the mortgage business in the early 2000s and was able to survive continuously through the economic challenges of the late 2000s through until today, consider using that broker.
- How competitive are the lender’s rates? You won’t be able to answer this question well until you talk with various lenders and comparison shop. Just because lenders boast about low rates doesn’t mean that they can deliver on their promises or that their lower rates will make up for shoddy service. If you narrow your selections down to a couple of lenders or brokers, don’t hesitate to ask the lender that you like best to match the rate of the lowest-priced lender you find. Loan rates and charges are negotiable. You have nothing to lose by asking.
Be sure to ask the lender for a written estimate of all loan costs and fees prior to signing your loan application. Getting such estimates from all lenders you’re considering enables you to cut through the inevitable sales pitch you hear from lenders about how competitive their rates are.
- Does the lender speak your language and candidly answer your questions? Good, ethical mortgage lenders and brokers can clearly explain their loan programs without using jargon or verbal obfuscation. They’ll candidly disclose all fees and answer all reasonable questions. A major red flag is if you ask a question and don’t get a follow-up response, which either indicates that you’re dealing with someone evasive or who lacks follow-up.
Good lenders meet deadlines, which is especially critical if your loan is for a home purchase. Missed deadlines can sabotage your purchase. If you’re refinancing to lower your loan rate, delays cost you money and could cause you to miss out on capturing low rates if rates rise during a lender’s delays.
In addition to questioning lenders and mortgage brokers you’re considering working with, after you narrow down your search to the two or three strongest candidates, ask for customer references. Use the same questions in the preceding list to select the winner.