Mortgage Brokers

Mortgage brokers make their living by bringing lenders and borrowers together. In that way, they are somewhat similar to a real estate broker, who brings buyers and sellers together.

In the same way that you need to be clear that the real estate agent is working on your behalf (and not just for the highest commission), you'll need to be sure that the mortgage broker is working on your behalf. The borrower usually pays the broker in the US, so the temptation for the broker is to take an approach that will increase the fee. In some cases, the broker may approach lenders that are charging a higher interest rate (which will mean a larger fee to the broker). Obviously, these lenders may not be the best bet for you.

So why would you use a broker? A broker's access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application. If you have contracted with the broker to act as your agent, the broker is obligated to find the best deal. However, if you have not contracted with them, they are under no such obligation. As a result, in the absence of a contract, you should consider working with more than one broker for mortgage quotes, in order to be sure that you are really getting a good assessment of the lenders interested in your business.

Brokers also make money based on the size of the loan. Why does this matter? It may mean that the broker will try to talk you into taking a larger mortgage than you need, and using the extra money for extras for the house. Be aware that the rationale for the broker is a bigger commission and that you are ultimately responsible for the size of the loan. Don't be talked into something you can't afford.

How much can you expect to pay a broker? The average fee in 2004 was 1.7 percent of the loan amount, according to a national survey of the industry by Wholesale Access. Customers who want to pay a smaller broker's fee can ask the broker to increase the interest rate on the loan. In exchange, the lender will pay some or all of the fee. This is called a "yield spread premium."

There are unscrupulous brokers out there. Be aware that they can also increase the interest rate without a request from the customer. The broker will still get the fee from the lender, but won't pass it along to the customer.

How can you protect yourself from this kind of dirty dealing? Watch for any extra fees paid by the lender and listed on closing statements. Fees paid by the lender to the broker will appear as "paid outside closing" or "POC." Check your closing statement for such fees, which often are listed in a different place than other closing costs. Also, ask if your broker is receiving any such fees in exchange for raising your interest rate. If so, the fee you pay the broker should be reduced by the same amount as any "POC" fees.


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