Protect Your Dream Home From Shady Mortgage Brokers
By Alex Levin
Investing in a home is generally the largest purchase someone will make and the miles of paperwork involved leave an unfortunate amount of room for error. After you’ve spotted the perfect picket-fenced Victorian or a penthouse with a view, it might seem only natural to find a mortgage broker to handle the fine print.
Mortgage brokers work on your behalf to shop around at multiple lending institutions and find the best package deal for your home loan.
While the best brokers can help streamline an otherwise harrowing process, there are always a few wiseguys mixed into an industry of predominantly legitimate professionals. Getting sucked into broker’s money-making scheme can quickly lose your dream house as well as your down payment. Before signing on the dotted line with any broker, ask yourself the following questions to confirm that the broker is up-to-date in maintaining their mortgage bond from a reputable surety.
Can other brokers offer the same results?
Just like brokers shop around for the best rates, it’s also your responsibility as a consumer to shop around for the best broker. The first red flag you should notice for an ill-intentioned broker is an uncanny ability to get you qualified for more house than you can actually afford. If one broker’s offer is drastically lower than the rest or he makes promises that seem too good to be true, it’s likely something shady is going on.
Depending on the industry contacts and previous interactions they’ve had, different brokers may be able to work out varying deals with a given lending institution. However, if a broker offers you a loan twice the amount of what your local bank quoted you he’s likely fudging some numbers on your application. The most basic form of mortgage fraud is where brokers inflate the income numbers on your loan application and falsify documents to back it up. When you’re suddenly approved for 50 percent more money than you expected, the broker expects to take a bigger cut in fees and commission.
Can we actually afford this house?
Before even beginning your home search, use online tools like MortgageCalculator.org and BankRate.com to get an idea of how much house you can actually afford with your current financial situation. When you have a few properties that you are considering, sit down with a financial adviser at your bank or credit union and see how much of a home loan you would be eligible for. If a broker suddenly approaches you and says that he can easily get you approved for a loan that’s significantly higher than what your research has suggested, it’s likely a sign that he’s doing something illegal behind the scenes.
What am I really paying for?
Ask your broker how he is making money on this deal. Brokers generally make their commissions from a flat fee paid directly to them by the buyer or through an interest rate markup. If the broker answers that question without breaking a sweat, ask him next whether his yield-spread premium would be any lower if you chose a different kind of loan. The yield-spread premium refers to the money a broker earns from lenders, an area many unethical brokers exploited when mortgage fraud was rampant a few years ago. If a yield-spread premium is particularly high for a given loan, it could indicate that the bank is paying a broker more to sign buyers into a high risk loan they are likely to default on.
What do I have in writing?
Though Senator Charles Schumer has previously fought to establish a Financial Product Safety Commission which would legally obligate brokers to work in the best interests of their clients, it has yet to gain Congressional approval. As things currently stand, brokers work only for themselves and can shop around for as many or as few offers on a loan as they please. If you find a broker you like, but are leery of his motives, ask him to sign a fiduciary, or a document stating he will work only in your interests. If a broker balks at the suggestion, you may want to reconsider using his services. Rates and costs presented to you by a broker may be given in “good faith” but there is no legal mechanism binding a broker to his promises. Protect yourself by asking for a guarantee of all estimates in writing and keep several copies on hand.