What are the advantages to using a mortgage broker to find you a loan? Or more importantly what services do they provide that I would otherwise have to do myself if I sought out a loan on my own?

A mortgage broker is beneficial in finding the best loan. I currently lend in 38 states and have
over 200 lenders, therefore I can do any type of loan ie... Residential, Commercial, investment, hard money ext. Call me I can get it done for you!

Brian - Thanks for the reply.

What else does a mortgage broker's service provide. I understand that they can draw from a large pool of lenders to find the best rate. I have one currently now and have found two rates that beat his and I found them on my own. Bank of America, my local bank blows his stuff out of the water. I feel like I am getting nickel and dimed with fees and buy downs. I just don't get it. What else is this guy doing for me other than finding a loan. I can do that on my own. What am I missing or not thinking of?

Thanks Dogwood

Your broker could just be greedy. I beat the banks 9 time out of 10, but I'm cheap.

What is he offering (rate, LTV, Documentation type and closing costs) and what are the banks offering?

Patrick -

The rate he is offering is 6.5 with a $2505 buy down to 6.25. LTV 80%, for a single family home. His flat rate is $2500 and I am unclear even at this stage what the exact closing costs are. I know that I need to pay around $61,000 at closing for my down, and total costs at closing. My down in $52,000.

Bank of America will do 6.25% and are running a special of no origination fee. With a buy down to 6.25% The down payment will be $51,800 plus fees and prepaid/reserves which equal around $5000. Total borrower costs at closing $56,850.04. compared to $61,000 and change - big difference in my book.

Wells Fargo will do it for $57,500

Ask your broker what Yield Spread Premium (YSP) he's charging you on the rates he's quoting you.

On loans involving mortgage brokers, banks pay a "rebate" to the broker for charging a higher rate. This rebate is known as the "YSP". The higher the rate the broker offers the borrower, the larger the rebate the broker receives from the bank.

Sounds like your broker is guilty of "rebate abuse." Every industry has it's bad apples (real estate agents included) - shop around not only for the best rate, but also for integrity of the mortgage broker or lender you work with. Otherwise, you can get burned... Good luck.

Damon got it right above. it basically works this way:

A bank offers a loan to brokers. let's say it's a 30 yr, fixed rate loan at 5.875% (5 1/8th). And they offer that loan at "par." Par means there are no costs, but no rebates either. OK, what does that mean. Well let's step forward to step back. The bank offers the same loan at a 6.125% rate with a 1 point rebate. that 1 point is the "YSP" damon mentioned above. That means this: The bank will PAY THE BROKER one percent of the loan amount if he can sell you the loan at 6.125% instead of 5.875%. If he gets you the loan at 5.875% (par), then the bank pays him nothing. THAT is the rebate. Now, if that broker can sell you the loan at 6.25%, he might get a 1.5 point rebate. At 6.5% he gets 2 points, and so on. (I'm just using round numbers for simplicity...the rebates don't usually hike up that fast). Now here's the rub...chances are, he can get you that loan at 5.75% or even 5.5%. But if he does that, there's a cost. You (the borrower) would have to "buy down" to that rate. It might cost you 1 point up front (1% of the loan amount) to buy down to that low rate.

Now...when the bank pays a broker or loan officer through a "YSP," that's called getting paid on the "back end." Any fees (origination fees, broker fees, etc.) the originator charges to the borrower up front are called getting paid on the "front end." So, mortgage professionals can get paid two ways: on the front end from the borrower or on the back end from the bank. OR BOTH!

Now, I'm not explaining this like I'm trying to say the broker or the bank is doing anything right or wrong. Mortgage folks get paid on both ends all the time. It's just one way of doing business. The greedier ones will give you a rate that pays them well on the back end and will charge you front end costs as well. Some folks will ONLY get paid by the bank. And some will ONLY get paid by the borrower. And some get both and are very fair about it. (like me ) Sometimes a broker charges more because he's so dang busy, he needs to thin the herd and he's in a position to do it. i know brokers here in the Miami area who don't do loans less than $500,000. God bless 'em.

So who is better? Well, that depends on your perspective.

Which is a better deal?

$200,000 30 year fixed rate loan at 6.5% that costs you zero in origination fees. (NOT closing costs...that's different)

OR

$200,000 30 year fixed rate loan at 5.875% that costs you $3000 in fees? (again, NOT closing costs, that's still different)

It all depends..and this is how I, and others like me do business. I would say this to you:


Dan: Patrick, I can get you the loan you want at 6.5% or at 5.875%, but the lower rate will cost you $3000 at closing. (1.5 points)

Patrick: Wow, that sucks. Why is that?

D: Well, at the higher interest rate, the bank will pay my fees. At the lower rate, I'd have to pass my fees on to you since my family needs to eat.

P: hmmm..I see. Which is a better deal?

D: Well, let's look at it this way. How long do you plan to own the property?

P: Three years. It's a starter place. We want another kid so we'll need a larger place in a few years.

D: Then take the higher rate loan.

P: Huh? Why would I want the higher rate?

D: Well, to get the lower rate, you need to spend $3000 today. If you take the higher rate, the bank is paying me the $3000, which means you save that money for now. At the higher rate, you'll pay $1231.43/month P&I. At the lower rate, you'll pay 1183.08/month P&I (Principal plus interest). That's $48.35/month difference. If you divide $3000 by $48.35 you get 62. That means that at the higher rate, you'd have to pay into this loan for 62 months ( a bit over 5 years) to spend the same $3000 you're spending TODAY to get the lower rate. If you sell the place in 36 months (thus paying off the loan), You'll have spent $48.35 x 36 which is $1740.60. So, taking the higher rate actually SAVES you $1259.40 over the next 3 years.

P: Wow, Dan, you're amazing.

D: It's not me, it's the calculator! There's more!

P: There can't be!

D: Yes! If you told me you were going to live in the place foe even 5 and a half years, i'd suggest the lower rate because it would cost you less over time.

Also, if you're SURE you're going to be there 3 years and not 2, then we might be able to save you more money. If you're willing to take a prepayment penalty for 2 years, I can probably get you a better rate. This would be a soft prepay which means you can sell the house, but not refinance it. if you refi in less than 2 years, you'll pay a penalty. but you plan to get out in three years, so it shouldn't be any big risk at all. I might be able to get you 6.25% if you take the prepayment penalty.

and so on...

You see, all I want to make on the deal is 1.5% of the loan amount. $3000. I don't care if you pay me or the bank pays me. Heck, like I said, I could probably do the deal for 5.5%, but then you'd have to pay me the $3000 i charge PLUS the amount to buy down to that rate, which I'm sure is probably 4-6,000 bucks. But that doesn't mean it's a bad deal. What if you just got a $20,00 inheritance? Maybe you've got the cash and you want low house payments. Stay in the home long enough and you'll end up saving a couple hundred grand by spending 20.

My long winded explanationcomes down to this...the deal may or may not be better based upon rate.

OK, that said. The difference between brokers and banks:

Brokers shop your loan "to get the BEST rate." (notice I didn't say LOWEST rate)

Banks give you their rate and that's it.

Upside of brokers...the best rate might in fact be the lowest. With lots of banks to choose from, there's a chance of getting a better price. Also, if a problem arises during the loan process, the broker can try another bank quickly, rather than YOU going in search of another bank.

Downside of brokers...The BEST rate might (if you're dealing with a fair-minded person) be the one where the broker gets paid what he wants and either does or doesn't pass the costs on to you. However, the BEST rate might also be one that sounds low enough, but pays a good rebate and he knows he's got you for the broker fee as well so he walks away with $7 grand on the deal and no one's the wiser. How the heck do you know the rates at First bank of Schenectady? There's also this trick: "Hey, I know we were getting you 6.25%, but your credit score dropped 10 points when they checked the tri-merge. that bank can't do the loan anymore, so I had to go with the next best thing which gets you 6.5%. It's only $30 more a month, so no big deal." Well, that no big deal is your problem not his. What does he care? And he could have done the loan at the same rate with the new credit issue, but his rebate might have dropped to .5%.

Upside of banks: They're generally cheaper in fees and maybe rates. that's because they generally pay their loan officers a flat rate or flat fee. No matter what rate the LO gets you, he's getting paid his amount so he has little reason to bump the rate up on you.

Downside of banks: No matter what you discuss with any broker or LO, in the end the inderwriters make the decisions. So if you don't fit their little "box" you won't get the loan. Then you begin you search all over again. Bigger banks have very strict rules to follow. BofA or CHASE or Citi all have great loan programs, but they do som many loans a year, they don't HAVE to accomodate everyone. they can deal with Mr. 760 credit score with $150,000 reserves in his checking account. When Mr. 639 FICO with $2200 in his checking comes along, they know that First Bank of Schenectady is there for them. they don't have to bend. Smaller banks are more flexible, but you generally have to take your broker's word for it.

Look, you're doing the right thing shopping around. Your Good Faith Estimate should include all known costs (taxes, escrows, title company fees may still be unknown, but they should ballpark them for you).

Decide how long you're keeping the place. Ask about ways to save money (prepayment penalties, temporary buy-downs, etc.). If you know you're moving in a couple years, ask about an ARM, or even the option arm if you're a bit of a dice-roller.

The mortgage broker saves you lots of time because he knows the packages and he knows the banks. There's probably no way you could do exactly waht he does, but you may not need to. if you're happy with a big bank, go with it. If not, tell him your concerns and see what he'll do. And there are hundreds of thousands of brokers...you don't NEED to deal with him.

Sorry if this got wordy, but it's a lot to explain. i hope it helped.

Good luck,

Dan

p.s. Again, for simplicity, i left out taxes and insurance/maintenance fees on the monthly payment. That would factor in to your decision, but I was just trying to make a point, not teach a mortgage math class.

As far as what a MB does for you vs. what you can find on your own - if you know exactly what you want and are fairly vanilla, ie, a conforming 30 yr fixed then maybe you can do better shopping on your own. But as Mr. Cook points out, how do you know that the loan you are shopping for is your best option for your situation? When choosing a loan officer is it best to look for the lowest rate quoter or someone who provides a little more value by taking a consultative approach? Many homeowners in this country are in the wrong mortgage because they looked only for the lowest rate quoter. I think you wil find that a broker is better choice as a consultant because a) they have a much, much larger choice of products to offer and b) most of the more experienced LOs work for brokers because they can make a much better living there. Banks pay less so it would only be logical that they get a lower quality LO, generally speaking of course there are always exceptions.

And Damon could you please explain more what "rebate abuse" is? It would seem to me that a broker can charge any rate that they wish (within legal parameters) and like any other product in this world if the consumer doesn't think they are getting enough value to justify the price then they can go elsewhere. No one gets abused unless they allow themselves to be. Is charging 6% to list a home vs. 5 or 4 or 3 "commission abuse?"

Thanks for the replies.

I had no idea that brokers got rebates. I was under the assumtion that a mortgage broker is going to be working for me to get the best deal for a pre-specified rate. I thought that when I was buying points that this fee was from the lender and not to cover the brokers lost rebate.

Here is my perspective. I hired a broker to find me the best deal possible - one that I could not find on my own. And I agree to pay a flat fee of $2500 to do this. But in reality, they don't find me a better deal. They find me a pretty good deal - but one that is also a good deal for them (one that has a rebate). How do I know that the broker hasn't found two loans - both the same rate, but one has a rebate and the other does not? Which one will he pick? And why aren't brokers up front and tell me that they also make money from the lender as well as me?

All I really want to do is pay someone upfront a fee for their service and trust that they will find me the best possible deal that they can. I do not want to deal with a used car salesman type situation. All I ask for is a bit of honesty and integrity - or I will do it myself. Dogwood

Well two things:

1. You kind of contradicted yourself here. In the first paragraph you state that you want to broker to find you "the best deal for a pre-specified rate." Then in the next paragraph you state "I hired the broker to find me the best deal possible." Did you ask for a specified rate or not? If you simply said "Find me the best deal," then that may not necessarily be the deal with the lowest rate.

2. If the broker finds you two perfectly good deals at your specified rate, then what do you care if he gets a rebate? If you choose the rate and he finds it, then it doesn't really matter if he's getting paid on the back end because your payments and rate are the same. It's kind of hard to say "Find me x%, but don't make more than $2500, ok?"

What you probably mean (I hope) is that you said "Look, I'll pay you a flat fee of $2500. You find me the lowest rate and best deal I can get with a credit score of xxx, full documentation, $xxxx in reserves, $xx,xxx/year income, etc..." Now that is a perfectly fair transaction. You can even add in "And if you get paid on the back end, I want that amount rebated to me if that's legal in this state." If the broker agrees to this (and if you're not some guy with multiple bankruptcies and lots of cash with no explanation for its existance), then I'd probably take that arrangement myself.

But just because a broker might get paid a small amount from the bank doesn't make him dishonest. As long as he's doing what you asked and what he agreed to, then he's fulfilling his side of the bargain. Now, if he wants referral business, then he should explain all the ways he's NOT getting paid anything more than the $2500 you gave him. Then you're his biggest fan. That would make good business sense.

But look, there are plenty of perfectly honest used-car salesmen out there. There are plenty of brokers who will do a great job for you. If you go into the deal expecting to get screwed, then you're just going to give yourself ulcers. Talk to your guy. If you trust him, do the deal. If not, find someone else. Tell them you'll pay them $2500 to do the deal and you want the best rate he can get, and you want to see the rate sheet. Make him prove it. if he can go a bit lower if he does the loan for "par" then ask him to do so because that's what he agreed to.

Good luck,

Dan

Rebates must be disclosed by MBs on both the Good Faith Estimate and the HUD 1. Some states may require additional disclosure.

What you seem to be talking about is a flat fee broker. They are few and far between and again are probably not the best mortgage guys, people who are good at what they do usually don't work for less than others.

Why don't you shop for a mortgage like you would shop for an accountant, chiropractor or other professional service. Once you have found the best value (combination of quality and price) then you've got it and you don't really need to worry about how they are getting paid.

Ok, how is this. I want the best deal. It seems to me that If the rebate is passed on to me, that would be a better deal than if it wasn't. A good deal to me is lowest possible closing costs and the lowest rate. I am comparing apples to apples here. In other words if a lender is offering say 6.25% with say $3000 in closing costs. That would be better than 6.25% with $5500 in closing costs. Which is precisely the situation that I have here. Now if he has a slightly higher fees and a lower interest rate and I am going to be in the house for a long time, then sure, I understand that that is a "better deal."

dcook22 - I don't think that I contradicted myself, I just didn't explain that what I truely am looking for is the best deal for my situation. Planning on being in the home for a very long time, I am comparing costs for a specific interest rate. Now if he can get me an even lower rate, then his fees become more justifiable.

If getting paid on the front end and the back end is the way that mbs do it, then so be it. I would have liked to have been told that by my mortgage broker. It seems wacked to me that a mb would offer me a loan with a several thousand dollar buy down fee when he has access to a loan with the same interest rate without a buy down fee.

I didn't go into the deal expecting to get screwed. In fact I went in with many recomendations and a high degree of trust. I was told by my broker that he couldn't be beat. I trusted him. My realtor was the one who brought this to my attention and told me that I should look into it.

SD - I never did get a good faith estimate. I must admit, that up until now I have been a little naive and you guys have been extremely valuable in getting me up to speed. Thanks to all of you guys.

SDmortgagepro-

Fees are relative. If all brokers get paid about x amount then fine. They should tell me so. The ones who provide the best service should get paid more. They ultimately should be getting me the best packaged deal. That is what I hired them to do and that is what I pay them for.


I will in the future compare the "value" that different brokers are offering. I just don't have the luxury of time now. We are closing in 14 days and the clock is ticking.

Thank you all again for your insight.

Dogwood..Oh My GOd!..If you're really closing in 14 days and dont have Loan Committment let alone a clear-to-close then you have only two choices. One go to your bank, a real bank, and beg them or see if they will get it done for you in time. There's almost no way to get burned doing that, assuming you have no credit, ratio, collateral, etc. and million other possible issues. You are setting up close to be a disaster because you have no laon yet. There is a process to it. I can see what's gonna happen. On closing day your going to have two agents there looking for funding, if it happens it wont be timely and the lender is going to get reamed because your got your loan last, not first. Big mistake. Hope it works out but get a loan app in and rate locked tomorrow.

Yeah, Dogwood. I'm glad we've been some help to you, but 14 days is rough. My company regularly closes loans in 7 days, but that's with no issues. One of the biggest time eaters is the simple verification of deposit that lenders require from your bank. It's a simple piece of paper that confirms you have the amount of money in the bank that you say you have. The trouble is, banks wil sometimes take up to 10 business days to get it back to you.

Anyway, there's a group of Mortgage Brokers that function the way you're describing. They're called UpFront Mortgage Brokers (a term coined by Dr. Jack Guttentag, A.K.A. The Mortgage professor ). You can search tme by state here: http://www.upfrontmortgagebrokers.org/search_umb.asp . I'm not sure you've got the time, but maybe they can help you out too.

Good luck.

Dan