As I mentioned in my Net Worth Update yesterday, I am going to cover mortgages this week at Suburban Dollar. Today is a post dedicated to those people who make their living selling mortgages, the Mortgage Brokers. They aren’t your bank, or any bank for that matter. They have gotten a bad rap lately and have taken a good chunk of undue blame for the mortgage meltdown.
What a Mortgage Broker isn’t
A mortgage broker is not a lender. They aren’t your bank and they don’t actually lend you the money to fund your new loan. If you were to go to your bank to get a loan that bank would be the lender and the broker so the money would come directly from the company of the person you are working with. A broker on the other hand works like an intermediary between you and a pool of lenders.
What a Mortgage Broker Does
Typically your broker is going to get your basic information, income, creditworthiness, etc.. and determine the best type of loan for you FHA vs Conventional and then looking at the pool of lenders they have available determine which one is a best fit for your specific situation. They will also monitor their lenders for a rate you are looking for and lock it in when they see it. The broker is going to take your application and make the initial assessment on whether or not you are going to qualify for a loan. It is possible your loan could still fall through in underwriting, but not very likely. Brokers handle the majority of the paperwork you end up signing and they make sure they have all of the appropriate documents in your file, T’s are all crossed and i’s are all dotted. They will request your appraisal and make sure it will cover the loan amount requested. Once they have all of the appropriate documentation they will send your paperwork to the lender for final approval, underwriting.
How Does a Mortgage Broker Get Paid
Brokers are paid in a couple of ways. The first and most upfront way is in the origination fee on the loan. You are charged the origination fee to cover the costs associated with paperwork and other administrative requirements for the application process. The broker is going to get a cut of that origination fee and the Broker company will get most of it. Brokers can also get paid through what is called a yield spread premium. Essentially there is what is called a Par Rate for mortgages, anything above Par will result in the broker receiving money from the lender. So if Par is 1% and he gets you locked at 1.5% he is going to get a YSP paid to him from the lender he sells the loan to. A typical yield spread you could expect to pay on loan is going to be between .5% and 1% of the amount of the loan. If you were getting a $150k loan with a yield spread of .5% the broker is going to make $750.
Keep in mind that the fees the broker is going to get paid on are usually negotiable, even if they say they aren’t. Some things are out of their control like the appraisal fee, title insurance fees, and other third party fees. Origination fees, Yield Spreads, and other broker related charges could be negotiable. Make sure you are looking for a broker who is not going to be charging ridiculous fees with a 3% yield spread. Brokers need to get paid too so don’t expect them to do your loan for free but their fees should be reasonable, make sure they are willing to discuss what their YSP is going to be upfront.
If you are buying a new home you should also try to negotiate the realtor fees, they are going to be getting 6% of the value of your home where your broker is looking to make at best between 1 and 2% of the value of your loan.
What Should You Ask Your Broker
- What are your fees? And are you willing to negotiate them?
- What costs am I likely to incur for each type of loan?
- Do you offer rate locks and for how long? (guarantees an interest rate for set amount of time)
- What is your Yield Spread Premium?
- What is Par Rate at each of your lender?
- Is there a pre-payment penalty? (If they say yes… walk away)
Stay tuned tomorrow for more mortgage fun.
If you are currently looking to either refinance or buy your first house and live in KY, MO, SC, or TN you can e-mail for info on the broker I used, he will shoot you straight.
The Rest of Mortgage Week
05/06 –Fixed VS. ARM Rate Mortgages
05/07 – Par Rates, Points, and PMI