By Dan Gmelin
Purchasing a new home is one of the most complex events in a person’s life. Properties vary greatly in terms of style, amenities, school district and, of course, the always important “location, location, location.”
The mortgage application process is a complicated aspect of the homebuying process, especially for those without past experience. This is where mortgage brokers come in.
What does a mortgage broker do?
A mortgage broker:
- Serves as the middleman between the lender and the borrower and handles the time-consuming process of securing the loan and gathering the considerable paperwork involved.
- Compiles all the necessary paperwork, including credit reports, bank statements and employment history for borrowers purchasing or refinancing a property.
- Is able to anticipate problems that could surface during the application process.
- Can determine which issues might create difficulties with one lender versus another.
Why some buyers avoid mortgage brokers
Sometimes homebuyers feel more comfortable going directly to a big bank to secure their loan. In that case, buyers should at least speak with a broker in order to understand all of their options regarding the type of loan and the available rate. Also, mortgage brokers are versatile and work with attorneys, underwriters, title companies, and even the sellers’ real estate agent until the keys to the front door are handed over.
In some cases, buyers avoid mortgage brokers because they believe they will shoulder the cost of brokers’ services themselves. However, the lender pays the commission to the broker at closing, which is customarily 1–2% of the amount of the loan. There is a relatively small fee, often called a loan origination fee, paid by the borrower to the broker. However, this fee can be rolled into the loan amount or paid separately – and sometimes it’s waived as an incentive to borrowers to use that broker’s service.
It’s important to be diligent when hiring any professional, including a mortgage broker. Some brokers are driven solely to close as many loans as possible, thus compromising service and/or ethics to seal each deal. Also, a mortgage broker will not have as much control over your loan as a big bank that underwrites the loan in-house.
How can borrowers capitalize on the benefits of a mortgage broker while also protecting themselves?
- Seek referrals from friends, family, and colleagues and check brokers’ references, if available.
- Ensure the broker has passed both the national exam and the exam in their state.
- Ask brokers which types of lenders they deal with. By simply stating they work with AAA-rated lenders, local credit unions, or secondary market lenders such as FNMA and GNMA, brokers will signal to the borrower whether they’re a good match.
- Inquire whether the broker has professional liability insurance in place.
The importance of professional liability insurance
Successful mortgage brokers who have been in business for a number of years often carry professional liability insurance, which should protect them from claims of negligence while they perform professional services during the process of originating and closing a loan. Examples of allegations that could be brought against the broker include mishandling the borrower’s documents, discriminating against a potential borrower or failing to safeguard a borrower’s information. In addition, mortgage brokers can be drawn into lawsuits due to errors made by a real estate agent or title agent during the closing process. Even though the mortgage broker is not liable, professional liability insurance would provide coverage for the ensuing defense costs.
The housing crisis hurt the reputation of the mortgage brokerage industry, but with increased regulation and scrutiny, it has made a comeback. There are more than 400,000 federally registered mortgage loan originators according to the NMLS Mortgage Industry Report, all ready and waiting to provide their valuable service to those making the most important purchase of their life.
Dan Gmelin is senior vice president, head of Architects & Engineers and Miscellaneous Professional Liability for Argo Pro.
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