Seventy percent of home loans are initiated by mortgage
brokers. Although there are some advantages to using
a mortgage broker, one must proceed with caution. Mortgage
brokers receive fees and incentives for their services,
and have little incentive to find you a mortgage loan
that has fewer fees. The broker stands to profit by
selling you a mortgage with unattractive rates, hidden
costs and pre-payment penalties.
A mortgage broker is not the originator of a loan.
The broker does not make the loan directly, but acts
only as a middleman between the lender and borrower.
As such, the broker is not subject to the same regulations
as mortgage companies and banks. While a good broker
will be knowledgeable about mortgages, and real estate,
in the general sense, there is very little oversight
in the mortgage brokerage business.
Because they do not lend money themselves, there are
no financial requirements to start a mortgage brokerage
business, and in some states, anyone who has the wherewithal
to print some business cards can call themselves a mortgage
broker. Ultimately, the best mortgage broker will be
one who has been in the real estate or financial services
industry, and has plenty of connections.
In response to predatory lending practices, many states
have recently started to initiate licensing requirements
for mortgage brokers. Requirements vary from state to
state, and may include requirements for posting of a
performance bond, education or experience in the mortgage
industry, passing an exam, and possessing a physical
place of business within the state.
While some states have stiff requirements, others merely
issue licenses to anyone who pays the fee, and other
states have no requirements at all. Texas, for example,
requires mortgage brokers to post a $50,000 surety bond,
have a bachelor’s degree in finance, banking,
or business administration, and 18-36 months experience
in the industry. Iowa brokers must post a $15,000 surety
bond, but have no other requirements. In Kansas, brokers
are licensed but do not have to meet any specific requirements,
and in Alabama, there is no licensing at all.
An honest broker can be a valuable asset to a borrower,
in providing information on many different lenders and
in finding the best rates and terms available. Often,
a broker will have connections or access to mortgage
lenders that a borrower would not otherwise have approached.
Your mortgage broker will also be a valuable source
of information about how to qualify for a mortgage,
and may be able to assist you in finding the best house
for your financial situation.