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Selecting a Mortgage Broker

Should You Use One?
      To use or not to use a broker, that is the question.  Why and when should you consider using a mortgage broker?  Why not go to your local bank where you have been a customer for years?  If you use a mortgage broker, should you visit the zillion-and-one mortgage Web sites now in operation, answer one of those e-mail solicitations you've received from lenders, or reply to some the many newspaper ads?
      These are all alternatives and under various circumstances one or the other, and sometimes a combination, will be the best way to find a loan.

1. Do you need an "80% N/O/O Cash Out 1-4 Family FIV"?
2. How about an "80% NIV -- Purchase or Refinance; No Asset"?
3. Or do you have no idea what these words and numbers mean when seen in an advertisement?

    

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  For the majority of borrowers item 3 applies.  That's one of the reasons why more borrowers than ever before are going to mortgage brokers when looking for loans.  With a broker, they can shop among many, even hundreds, of mortgages with cryptic descriptions such as those listed to find one that best fits.
      Consumers and companies alike have long lamented the complexity of mortgage transactions.  The paperwork involved ties up a lot of time and the whole transaction can fall apart if everything doesn't come together by closing.
At the same time, life can be even tougher for customers who want someone they can reach on the phone quickly or who need specialized purchase or refinancing assistance.
That's why brokers can be a big help -- and part of the reason why they've become more popular over the past decade. A June 1999 study estimated that the number of independent mortgage brokerages was about 36,000 at the end of 1998, up from 7,000 in 1987, just 11 years earlier.  Those brokers, in turn, handled 70 percent of the estimated $1.7 trillion worth of mortgages originated in 1998, up from 20 percent of loans originated in 1987.
What's the attraction?  Brokers get money from wholesale lenders, add a few hundred dollars for their work, and "sell" it to borrowers in much the same way that Best Buy purchases refrigerators from General Electric, marks them up, and sells them to shoppers.  Because brokers can choose from many wholesale lenders who, in turn, have several specialized programs each, they can often find mortgages that closely match particular needs.  And, the cost is usually only nominally, if at all, higher.
For example, suppose someone wanted to get a loan to buy a home for 80 percent (80%) of the property's value, but didn't want to verify employment income (NIV) or brokerage and bank account assets (No Asset). Then consider that there is another person who wants to refinance the mortgage on an existing duplex he owns and make it larger to get some equity out as cash (Cash Out).  The loan in this second case is against a house that isn't the primary residence (N/O/O, or not owner-occupied), but the borrower doesn't mind fully verifying income (FIV).
A bank would not likely be willing to make the loan for either of these cases.  That's because it couldn't prove the first person would be able to pay that loan back and because it might be leery of allowing the second borrower to take out a larger loan against a rental property because those mortgages are considered riskier.  But a broker would know of lenders that had no problem with waiving those requirements.  As a result, both deals would likely get done.
If either of the two hypothetical borrowers went to a local bank, they would be offered that bank's relatively few fairly restrictive programs and that's it.  If they go to a competent mortgage broker, they will be offered a whole array of different institutions' products.  Because of the many different types of loan programs offered by many different lenders, each individual is going to find one that fits.
Borrowers looking for construction/permanent hybrid mortgages or those with credit problems make good candidates for the services of mortgage brokers.  The same holds true for people who want to purchase second homes or rental property, as well as current mortgage holders who want to refinance in order to take some equity out as cash at high loan-to-value ratios.
Shopping with a broker means accepting the fact that a local lender isn't standing behind your mortgage.  In most cases, the broker doesn't even technically originate and fund the loan; the wholesale lender does.  That lender may sell the loan to a separate company that services mortgages by collecting payments and performing other tasks, and that company may, in turn, sell it again.  However, banks and thrifts also do this, although some are portfolio lenders that keep some of the mortgages that they originate on their books.
Banks sometimes cut deals with people who have done a lot of business with them, too, so there are benefits to going to one for a loan if your need fits one of their few standard molds.
In a way, there are two kinds of entities out there:  (1) loan officers who offer products of their bank and (2)  mortgage brokers who offer products of multiple lenders or other mortgage brokers.
The principal advantage of the loan officer for the borrower is that he may have a recognizable identity for the borrower and the main benefit to the loan officer is that the borrower may offer a previous long-term relationship with the bank.
The advantage of the mortgage broker is that he has contacts with dozens of lenders.  That puts him in a position to search a large market for the best deal.  He's also in a position to get loans in market niches that single lenders might not cover.  But the weakness of a mortgage broker is that there's usually no identity.  People go to mortgage brokers at their hazard if they don't know the important factors about selecting one in the first place.
There are cautions that must be considered whether a consumer chooses a conventional lender, an individual broker, or a mortgage company Web site.  The borrower should know the various types of products available, especially if it's a niche loan that's more complicated than a standard 30-year fixed mortgage.  After selecting a mortgage type, the borrower must carefully compare the rates, points, and other costs for several different lenders.
The bottom line is that you can do a lot better at a mortgage broker, but you can also do a lot worse.  What you must remember, even if you have a complicated situation, is that you need to shop.

Mortgage Broker Regulation
Before even worrying about selecting a mortgage broker, know the degree of regulation in your state.  Knowing this will determine how you much care you must put into making the selection and will influence how you do it.
Unlike banks or thrifts, mortgage brokers aren't directly regulated by any federal agency.  Because it doesn't take much to get into the business, the number of brokers out there has soared in recent years, as mentioned earlier.  That means plenty of  incompetent or just plain unscrupulous people are out there looking for business.
Regulation of mortgage brokers is not very extensive compared to the regulation of real estate agents.  In most states, the regulation is weak.  Some states do not regulate mortgage brokers at all. Unfortunately, many brokers are involved in a lot of questionable practices.  There are all kinds of opportunities for unscrupulous mortgage brokers to rip off customers who are poorly informed and don't understand what it is that they are buying.
The degree of state regulation of mortgage brokers varies greatly among the states.  Some states have no educational or professional requirements to become a broker, while others mandate that potential brokers attend mortgage classes, pass written tests proving their competence, and some even require working in the field for a licensed broker for a year or two, serving an apprenticeship.  To the degree that your state regulates mortgage brokers, this regulation will provide an equivalent degree of protection.  You will need to be a lot more careful selecting a broker in a state that has no regulation compared to a state in which they are highly regulated.

Selecting A Broker

It's good to have a broker who's nice, but it's better to have an ethical and competent broker who will get the type of loan you need with rates and costs that are competitive.  

      The worst way to choose a broker would be to choose one at random from the yellow pages, from a newspaper ad, or from an add on Web or in your e-mail.  It is relatively easy for anyone to obtain a mortgage broker license in all but the most highly regulated states.  Mortgage brokers are cranked out at high rates in this country, maybe not as fast as real estate agents or lawyers, but the numbers are increasing rapidly.  Additionally, most seasoned professionals are not likely to get caught up in the "mine is bigger than yours" yellow pages ad contest. The pro makes their money by who and what they know and by referral from satisfied customers, not by an ostentatious show.
  The best way to select a
mortgage broker is the same as the best way to select a dentist, lawyer, veterinarian, or real estate agent; by having personal knowledge of the individuals and of their abilities and experience.  The next best way is to get a referral from a trusted acquaintance who has the personal knowledge.  A significant percent of the people are getting their loans through a broker today.  That means that a lot of your acquaintances have worked with a broker.
      If the above isn't feasible, for example because you are new to the area, the alternative is to do some research on your own.
Determine who is brokering a lot of loans in your area.  There are a number of ways to do this including: reading advertising and newspaper articles and talking with real estate agents, lawyers and CPAs.  Select two or three apparently successful individuals or firms in the area.  Interview the head man at each firm, as well as associates to whom you might be assigned, and make your selection of the candidates based on the interviews and the agreement that they want you to sign, if any.
      If the broker requires an employment agreement, you should be sure that you understand the commitment that you are making.  It is probably reasonable that you agree to utilize only that particular broker.  After all, it wouldn't be fair if the broker spends many hours on your behalf and you then get your loan through another broker.  However, the commitment should have a reasonable time frame, maybe 30 or 60 days, and should not obligate you to paying a fee unless you close the loan.  It is only fair, however, that you would be obligated to paying his fee if you get the same loan from another broker that he has presented to you.
If you feel particularly brave and consider mortgage brokers on the Web, you need to consider other matters.  A Web site business is seen everywhere.  The site of a broker in a state that is completely unregulated can be seen in states that highly regulate mortgage brokers.  Do not use a broker who does not meet the licensing laws and other regulations of the state in which your property is located.  If the broker does not have a physical location in the area of your property, it is even more important to check him out.
No matter how you find broker candidates , you should check with the licensing agency in your state if it is a state that regulates mortgage brokers.  Are the company and its associates properly licensed?  Have any complaints been filed against either?   Has the mortgage brokerage firms or individual brokers that you are considering ever faced state regulatory sanctions in the past.  Most states maintain some kind of list of individuals and companies who have been fined or had their licenses revoked.  Check them out via a phone call to the state's mortgage broker license regulatory agency or on the agency's Web site .  Even if it's a state that does not regulate mortgage brokers per se, try to check them out with the BBB and by other means.  

What to do after you select the broker
      So now you have a mortgage broker who (1) lives and maintains an office within 2 miles of your property, (2) was highly recommended by several different acquaintances who personally utilized his services, (3) is duly licensed in your state and has an impeccable record with your state's regulating agency, and (4) you find from your preliminary interview that you like his personality - what next.

Review possible programs
      Once he knows your property, your financial circumstances, and various other things about your loan requirements, the broker should be able to narrow things down a couple of possible loan types.  Get descriptions in writing of the exact programs being offered.  Because many people who go to brokers are getting specialized mortgages that may not be as straightforward as 30-year fixed-rate loans, it's especially important to know what you want and know if that's what you're being offered.  That way, you can compare rates, fees, and points on an apples-to-apples basis.

Fully understand the program best suited to your needs
      Once the specific program that fits you has been chosen, make sure that you know what information and documentation will be required for your application.  Be sure the requirements are acceptable for your circumstances and desires.
     Ask your broker what his total compensation will be and who is paying what.  Brokers are sometimes paid by both the lenders who underwrite the mortgages and the borrowers who get them.  While there is nothing inherently wrong in this, you should know in advance what the compensation will be and feel comfortable about it.
      Get a detailed good-faith estimate of all costs and determine that these costs seem reasonable and in line with what you expected based on previous discussions with your broker.  Costs may include credit report cost, appraisal fee, points and other loan fees, title insurance premium, and, of course, the mortgage brokerage fee.  There may also be other expenditures that are actually pre-paid expenses rather than a cost of the loan itself.  Included in this category are pre-paid interest, hazard insurance premium, property tax, or impound deposit.
Rate locks from a broker can be a problem if you're not careful.  Keep in mind that a lock usually has to take place during business hours for the lock to be effective that day.  Communication problems can delay the transaction and leave you with a higher rate if rates go up over night.  If you do a lock, get written proof that the lock has been properly executed.   

Closing
You should be able to get a final statement prior executing documents. Check the previously received good-faith estimate and other understandings against this pre-closing statement and also against the final closing statement.

  • Check that the broker's compensation is as was understood.
  • Check that all other costs are as expected
  • Check any pro-ration calculations

State-by-State Summary
of
Mortgage Broker Regulation

Mortgage broker regulations vary widely from state to state, but this chart should give you an idea of how rigorous broker requirements are in your particular state. Some states impose significant educational requirements.  Others demand proof of sound financial footing.  A few states impose no regulations at all while others conduct background checks designed to weed out applicants convicted of fraud or other crimes, as well as those who have had their licenses revoked in other states.

A few final things to keep in mind: some states refer to mortgage brokers by different names while others license brokerage offices, but not individuals.  Some states, California for example, allow real estate brokers to also be mortgage brokers.

Select First Letter of State Name
A C D F G H I K    L   M   N   O   P   R   S   T   U   V   W
Click on Any State Name to Return to Top

STATE
REGULATING
AGENCY
PHONE
 LICENSE
INFO 
SOME REQUIREMENTS

Alabama

No regulations

N/A

N/A

N/A

Alaska

No regulations

N/A

N/A

N/A

Arizona

State Banking Department

602-255-4421

Web Site

Must maintain a surety bond for $10,000 to $15,000. Must have three years of experience in lending and pass a written exam.

Arkansas

Securities Department

501-324-9260

Web Site

Must maintain a net worth of $25,000 and surety bond of $35,000. No specific education or experience required.

California

Department of Real Estate ; Department of Corporations

916-227-0931

Web Site

Most brokers register under the Department of Real Estate. Must have two years of industry experience during the last 5 years or a four-year college degree and pass an exam.

Colorado

No regulations

N/A

N/A

N/A

Connecticut

Department of Banking, Consumer Credit Division

860-831-7225

Web Site

Must maintain a surety bond for $40,000. No specific education or experience requirements.

Delaware

Office of the State Bank Commissioner

302-739-4235

Web Site

Must maintain a bond of $25,000 and provide references from companies that have done business with them. No specific education or experience requirements.

District of Columbia

Office of Banking and Financial Institutions

202-727-1563

Not
online

Must maintain a surety bond ranging from $12,500 to $50,000. No specific education or experience requirements.

Florida

Office of the Comptroller, Department of Banking and Finance

850-410-9895

Web Site

Not subject to any specific financial requirements. Applicants for license must receive classroom education and pass a written test.

Georgia

Department of Banking and Finance

770-986-2812

Web Site

Must maintain a net worth of $25,000 or surety bond for $50,000. Must also have two years of lending experience or complete 40 hours of coursework in the field.

Hawaii

Department of Commerce and Consumer Affairs

808-587-3295

Not
  online

Must maintain a surety bond for $15,000. No specific education or experience requirements.

Idaho

Department Of Finance

208-332-8004

Web Site

A surety bond for $10,000 for home office and additional $10,000 for each office outside of Idaho. Applicants must have three years experience in residential mortgage lending if they are in charge of the place of business.

Illinois

Office of Banks and Real Estate, Bureau of Residential Finance

312-793-3000

Web Site *

Must have a net worth of $35,000 and a surety bond for $20,000. Must have three years' experience in real estate financing or attend mortgage lending classes.

Indiana

Secretary of State, Securities Division

317-232-6681

Web Site

Must post a $50,000 bond. Also must take 24 hours of classes on loan brokering.

Iowa

Division of Banking

515-281-4014

Web Site

Must maintain a surety bond for $15,000. No specific education or experience requirements.

Kansas

Office of the State Bank Commissioner, Division of Consumer and Mortgage Lending

785-296-2266

Web Site

Not required to meet any specific requirements.

Kentucky

Department of Financial Institutions

800-223-2579

Web Site

Must maintain a surety bond for $50,000. Applicants must complete a 30-hour training course.

Louisiana

Office of Financial Institutions

888-525-9414

Web Site

Must have net worth or surety bond of $50,000. Also must complete 10 hours of education and pass a lending exam.

Maine

Office of Consumer Credit Regulation

207-624-8527

Web Site *

Must maintain a bond of $10,000. No specific education or experience requirements.

Maryland

Division of Financial Regulation

410-333-6830

Web Site

Must maintain a surety bond ranging from $15,000 to $75,000. Must have three years' experience.

Massachusetts

Division of Banks

800-495-2265 ext. 501

Not
online

Must demonstrate financial responsibility but no specific requirements. Must show a year's experience in the field; course work can trim the experience requirement.

Michigan

Division of Financial Institutions

517-373-3460

Web Site

Must maintain a net worth of $25,000 and a bond for $25,000. No specific education or experience requirements.

Minnesota

Department of Commerce

800-657-3602

Not
online

No specific financial, education or experience requirements.

Mississippi

Department of Banking and Consumer Finance

601-359-1031

Not
online

Must maintain a surety bond for $25,000. They must also have two years' lending experience or pass an exam.

Missouri

Division of Finance

573-751-3463

Web Site

Must maintain a net worth of $25,000 and a surety bond for $20,000. No specific educational or experience requirements.

Montana

No regulations

N/A

N/A

N/A

Nebraska

Dept of Banking and Finance, Financial Institutions Division

402-471-2171

Web Site

Must have surety bond for $50,000 required. No specific educational or experience requirements.

Nevada

Dept of Business and Industry, Financial Institutions Division

702-687-4259

Web Site

Must have or work in an office with a supervisor who has two years mortgage lending experience.

New Hampshire

Banking Department

603-271-3561

Web Site *

Must maintain a surety bond for $20,000. No specific educational or experience requirements.

New Jersey

Department of Banking and Insurance

609-984-2777

Not
online

Must have a net worth of $50,000 and a bond for $50,000. Also must pass a written exam.

New Mexico

Regulations and Licensing Department, Financial Institutions Division

505-827-7100

Not
online

Must maintain a $25,000 surety bond. No specific educational or experience requirements.

New York

Banking Department

800-334-3360

Web Site

Must have two years of experience in the field.

North Carolina

Office of the Commissioner of Banks

919-733-3016

Web Site

Must maintain a $25,000 surety bond. No specific educational or experience requirements.

North Dakota

Department Of Banking and Financial Institutions

701-328-9933

Web Site

Must maintain a surety bond for $25,000. No specific educational or experience requirements.

Ohio

Department Of Commerce, Division of Financial Institutions

614-644-7527

Web Site

Must maintain a surety bond of $25,000 for their main office, plus $5,000 for each branch office. Must also have 3 years' experience in the lending field or an associate's degree in finance, banking or business admin.

Oklahoma

Department of Consumer Credit

800-448-4904

Web Site *

Must have two years continuous experience in the residential mortgage loan industry, real estate sales or lending industry. Also must have a trust account in a federally insured bank in Oklahoma.

Oregon

Department of Consumer & Business Services, Division of Finance & Corporate Securities

503-378-4140

Web Site

Are required to maintain a surety bond for $25,000 to $50,000. They must also have at least 3 years experience in mortgage lending or a related business.

Pennsylvania

Department of Banking

800-722-2657

Web Site

Must maintain a bond for $100,000. No specific educational or experience requirements.

Rhode Island

Not available

401-222-2405

Not
online

Must have a net worth of $10,000 and post a $10,000 bond, plus $5,000 for each additional office. Are also required to have five years experience in the field.

South Carolina

Department of Consumer Affairs

800-922-1594

Web Site

Must maintain a surety bond for $10,000. Must have worked for two years as a loan originator. Can substitute six hours of academic study for one of those years.

South Dakota

Division of Banking

605-773-3421

Web Site

No minimum financial requirements, no specific educational or experience requirements.

Tennessee

Department of Financial Institutions

615-741-9340

Web Site

Must maintain a net worth of $25,000 and a surety bond for $25,000. No specific educational or experience requirements.

Texas

Finance Commission of Texas, Savings and Loan Department

877-276-5550

Web Site

Must maintain a net worth of $25,000 or a surety bond of $50,000. Must also have a bachelor's degree in finance, banking or business admin and 18 months experience in lending or three years lending experience.

Utah

Department of Financial Institutions

801-538-8830

Web Site

Must have surety bond for $25,000. No specific educational or experience requirements.

Vermont

Dept. of Banking, Insurance, Securities & Health Care Admin.

802-828-3307

Web Site *

Must maintain a bond for $10,000. No specific educational or experience requirements.

Virginia

 Corporation Commission, Bureau of Financial Institutions

804-371-9705

Web Site *

Must maintain a surety bond for $5,000.

Washington

Dept of Financial Institutions, Division of Consumer Services

360-902-8703

Web Site *

Must maintain a surety bond for $20,000 to $60,000. Applicants must pass an exam or demonstrate two years' experience in the field.

West Virginia

Division of Banking

304-558-2294

Not
online

Must maintain a net worth of $10,000 and a bond for $25,000. No specific educational or experience requirements.

Wisconsin

Department of Financial Institutions

608-261-7578

Web Site

Must maintain a bond for $10,000 or net worth of $100,000. No specific educational or experience requirements.

Wyoming

No regulations

N/A

N/A

N/A

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