Lots of parties shared blame for the mortgage crisis that sparked the recession: lenders with loose standards, buyers with appetites bigger than their wallets, regulators and credit-rating agencies that didn’t see the storm rising.
And then there were some unscrupulous mortgage brokers, widely blamed for steering borrowers to loans that would blow up in their faces.
To keep this from happening again, states have established the Nationwide Mortgage Licensing System for consumers to check up on mortgage originators such as brokers. Next year you will be able to log on to a Web site to find out whether your broker has been disciplined for improper practices and has received required education and credentials.
But why bother with a mortgage broker at all, especially in this age of online mortgage shopping?
Historically, mortgage brokers handle about two-thirds of mortgages, serving people who feel out of their depth in figuring the best mix of points, rates and fees. Because a broker typically deals with numerous lenders, he or she can keep on top of the ever-shifting loan landscape. A broker can also help with special circumstances, like finding lenders who are more accommodating to self-employed applicants. (If you're self-employed, find out how to apply to for a mortgage here.)
Good brokers sense whether rates are likely to rise or fall in coming weeks, and they can guide their customers in assembling application documents.
Brokers are paid primarily by adding a “markup” to the wholesale mortgage rate and points charged by the lender. If the wholesale rate offered to brokers is lower than you could find on your own, the markup may seem insubstantial to you. But the system can create a conflict of interest, with the broker promoting the loans that offer the biggest markups.
That’s why so many brokers pushed subprime loans to borrowers who could have qualified for ordinary, prime loans that were less likely to cause problems down the road.
After being burned by the mortgage crisis, lenders have tightened their standards and stopped offering the most toxic types of loans. Because traditional 15- and 30-year fixed-rate loans now dominate the market, there may be less need to ask a broker to sort through the alternatives.
Still, brokers do offer convenience, and they can be valuable so long as you don’t take every recommendation as gospel.
Before hiring a broker, do a little shopping on your own to get a sense of the market. Use the BankingMyWay.com survey to see average rates on common types of loans, then use the shopping tool to ferret out market-beating deals. A broad array of mortgage calculators can help you figure loan payments and see what interest will amount to over the life of a loan.
Pick a broker who has been in the business a number of years, long enough to have developed a sense of which direction rates are likely to go in the weeks or months before you must lock in a deal. Find a broker who deals with lots of lenders. The National Association of Mortgage Brokers has a referral service.
Don’t be shy about asking how the broker is compensated, and whether any specific loan will pay him more than other types of loans or similar ones from other firms. Get a list of all fees in writing.
Don’t talk about specific loans before discussing in detail the type of loan most suitable for you. The broker should show real interest in how steady your income is, how long you expect to keep the home and whether you have savings to fall back on if something happens to your income.
Be wary if a broker insists you act immediately. It may be because his or her window for collecting an outsized commission is closing.
When the broker recommends a specific loan, ask to see comparable loans from other lenders, and use the search tool to double-check.
Finally, don’t be afraid to walk away at the first sign you are being manipulated. There are lots of other brokers out there, and you can always shop on your own.
Remember that lenders may not list every loan they offer on their Web sites. So, once you’ve found a few attractive deals, call the lenders or walk in. Explain your needs, and they’ll be glad to help you find the right product, and to keep you posted as loan terms change.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.