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What mortgage brokers don t want you to know?
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27th Oct 2009 by JonB
Mortgage Brokers certainly have a somewhat dubious reputation. Like most stereotypes this was caused by the behavior of a minority, rather than the majority. But there are a few things you will want to look out for what dealing with a broker.
First, ask to know how the broker gets paid by looking at the good faith estimate, or GFE. This document is designed to give you an idea of what everything is going to cost long before the loan closes. The broker may tell you that it is only an estimate, and that is true. But you should remind them that if their compensation changes by more than a nominal amount they are required by RESPA to re-disclose that GFE to you.
Next you should ask them if they are getting paid a yield spread premium (or YSP). This is a big one. Mortgage brokers operate in the wholesale mortgage market. Just like an wholesaler, they get their products (mortgages) cheaper than you can, specifically with interest rates. Three things can happen. The lender will give you a lower interest rate, but you will have to pay "points", or cash upfront to get it. They can give you "par" rate which costs you nothing. Or the broker can quote you a higher rate. If the broker can sell you a higher rate the lender will pay them money. This is called yield spread premium.
For example (these numbers are arbitrary), a 5% mortgage could cost you 1% of the loan amount as cash up front at closing. A 6% mortgage may cost you nothing and make your broker nothing. But if the broker can sell you a 7% mortgage, the lender may reward him by paying him 1% of the loan amount in cash. There are laws that require brokers to disclose this, but the disclosure is often lost in a sea of paperwork. Get around this by asking your broker point blank in they are being paid yield spread premium.
Mortgage Brokers certainly have a somewhat dubious reputation. Like most stereotypes this was caused by the behavior of a minority, rather than the majority. But there are a few things you will want to look out for what dealing with a broker.
First, ask to know how the broker gets paid by looking at the good faith estimate, or GFE. This document is designed to give you an idea of what everything is going to cost long before the loan closes. The broker may tell you that it is only an estimate, and that is true. But you should remind them that if their compensation changes by more than a nominal amount they are required by RESPA to re-disclose that GFE to you.
Next you should ask them if they are getting paid a yield spread premium (or YSP). This is a big one. Mortgage brokers operate in the wholesale mortgage market. Just like an wholesaler, they get their products (mortgages) cheaper than you can, specifically with interest rates. Three things can happen. The lender will give you a lower interest rate, but you will have to pay "points", or cash upfront to get it. They can give you "par" rate which costs you nothing. Or the broker can quote you a higher rate. If the broker can sell you a higher rate the lender will pay them money. This is called yield spread premium.
For example (these numbers are arbitrary), a 5% mortgage could cost you 1% of the loan amount as cash up front at closing. A 6% mortgage may cost you nothing and make your broker nothing. But if the broker can sell you a 7% mortgage, the lender may reward him by paying him 1% of the loan amount in cash. There are laws that require brokers to disclose this, but the disclosure is often lost in a sea of paperwork. Get around this by asking your broker point blank in they are being paid yield spread premium.
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26th Oct 2009 In Brokerage
1 Answers | 119 Views
Subjects: broker,
mortgage broker,