Borrowers who don’t know how to deal with mortgage brokers waste their own time as well as that of the brokers. Borrower ignorance also encourages brokers to be hustlers rather than professionals.
In general, borrowers should view brokers as providers of professional services for which they are paid a fee. That fee is the only price brokers control, and it is the only price that borrowers using brokers should shop.
Shopping Rates and Points With Brokers Is a Waste of Time. To provide accurate price quotes, brokers need to know many things about the borrower, the property and the transaction. This information must then be matched against the prices contained in voluminous price sheets the brokers receive every day from multiple lenders. This is a lot of work, and few brokers will do it for casual rate shoppers.
Brokers in this situation typically quote the best price possible — if the information required to price accurately is not used, this price is as good as any other. Some brokers will go even further and price below the best price possible, a practice know as “low-balling.” The intent is to encourage the shopper to select the low-balling broker, who if successful will later find ways to raise the price.
But even if borrowers receive accurate price quotes from brokers, price shopping is usually a waste of time. The market is so volatile that prices can change once or more before the day is over, and they will always be reset the following morning. The only effective way to price shop is to do it online where borrowers can compare quotes from multiple lenders within minutes of each other.
Borrowers should engage mortgage brokers in the same way that they engage other service providers, such as lawyers, architects or house painters: by assessing their ability to do the job effectively, the fee they charge for their services, and their guarantees or other assurances.
Assessing Brokers’ Ability to Help. Brokers should be interviewed about their qualifications and experience in the same way you would interview any other service provider. Engage the broker in a dialogue regarding your problem, and assess the response. Does this broker listen and respond thoughtfully? Or do you have the feeling he is trying to shoehorn you into something whether it fits or not?
You should also ask whether the broker will commit to a fee set in advance, and whether any guarantees are provided. Broker practice with regard to third-party services is a particularly telling indicator of service quality (see below).
Pricing the Broker’s Services. The fee for the broker’s services should be agreed to by both parties, in advance and in writing. If there is a separate processing fee, it should be included in the agreement. Upfront Mortgage Brokers follow these rules as a matter of course, and most other brokers will as well if the borrower insists on it. Don’t waste any more of your time on a broker who refuses.
The broker’s fee may be paid by you, by the lender, or by both. The fee is a negotiated item, but determining whether the fee will be paid by you or by the lender should be your decision alone. If you are short of cash and/or don’t expect to have the house very long, you may want to pay a slightly higher interest rate in order to have the lender pay the broker’s fee. If you have a long time horizon and enough cash, pay the broker yourself in order to get the lower rate.
Broker Guarantees: Upfront Mortgage Brokers provide four guarantees to borrowers that all brokers can and would provide if borrowers insisted on them.
–The broker’s total income from the transaction will not exceed the fee agreed upon with the borrower, as discussed above.
–The broker will provide the borrower with a copy of the rate-lock commitment from the lender as soon as it is received. This prevents the broker from substituting his or her own lock for the lender’s, a practice that puts a few additional dollars in the broker’s pocket but leaves the borrower unprotected against a serious spike in interest rates.
–The fixed-dollar lender charges shown on the Good Faith Estimate, which are usually not part of the lock commitment, will not be changed so long as the transaction is not changed.
–Third-party fees will be passed along with no direct or indirect markup by the broker.
Some brokers go beyond strict neutrality on third-party services, negotiating preferential prices with service providers and/or guaranteeing third-party charges. Brokers who do either are very likely to be superior in other dimensions of service as well.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.