Banks have been tightwads when lending money, and consumer eligibility requirements are tougher than ever for mortgages or refinancing. In this difficult environment, a mortgage broker can tailor a loan that suits your needs. And, thanks to new Federal Reserve rules, you’ll be protected from predators.
Mortgage brokers, middlemen who connect loan applicants with lenders, got a bad rap during the mortgage crisis, when the housing bubble and easy mortgage money attracted unscrupulous characters to the profession. Some steered consumers toward inappropriate loans that made them money. That changed in April 2011, when the Federal Reserve issued rules amending Regulation Z (Truth in Lending Act), which state:
- Brokers are only compensated based on the mortgage loan amount, not on a loan’s terms and conditions. (This eliminates an incentive to put borrowers into expensive loans.)
- They receive compensation from the borrower or the bank. (Previously, both borrower and lender may have compensated the broker.)
- They must choose loans in the consumer’s best interest.
Most brokers represent six or seven lenders, and shop competitively amongst them. If you work directly with a bank, you’ll have access to its products alone. A mortgage broker can help mitigate potential headaches by handling every aspect of the process.
“Good mortgage brokers act as financial advisers,” says Dave Donhoff, an independent financial adviser in Kirkland, Wash. “They’ll analyze your needs, and locate the best loan for you. They may also get better rates, because they work with different lenders.”
Before the financial crisis, it was relatively easy to become a mortgage broker, but things have changed. Each state has its own supervisory group, and a majority of licenses are handled by the National Mortgage Licensing System (NMLS), which was established in 2008, to improve supervision of the industry.
“A licensed broker must now have 20 hours of education, pass a state and national test, and undergo fingerprinting and background checks,” says Donald Frommeyer, president of the National Association of Mortgage Brokers (NAMB).
Consider going with a broker if:
- You want someone to support you through the process.
- You’re a less-than-desirable loan candidate (low credit score, spotty work history, self-employed).
- You want flexible terms (lower down payment, mortgages with terms other than 15- or 30-year).
- You don’t have time to shop around.
However, if you meet the higher standards that banks currently require, including a credit score over 740, a steady income, no debt, and assets in the bank, you can go directly to a bank. But you may not receive the personalized attention that mortgage brokers offer.
Costs of using a broker
Brokers get paid either:
- By the borrower, through upfront origination fees
- By the lender, with the bank paying a percentage of the loan amount
“There’s no common standard in fee-setting, but the average fee for brokers is around 1% to 2.5% of the loan amount,” Donhoff says.
Frommeyer, who has been in the business for approximately 35 years, says that brokers can generally get you a better interest rate, about 0.25% below what banks offer. How may this play out? On a $200,000 loan at 4.25%, for example, you’ll pay $983.88 per month, with total interest payments of $154,196.72. Bump the rate to 4.5%, and you’ll pay $1,013.27 per month, with total interest of $165,813.42. You’d save $352.68 annually — which equals $10,580.40 over 30 years — and an additional $11,616.70 in interest over the course of the loan with the lower rate.
To find a mortgage broker, get recommendations from friends, REALTORS®, or search the NAMB database to find a certified professional near you. Check licensing with the NMLS. A good broker can take the headaches out of the mortgage loan process.