Despite the mortgage industry being one of the most regulated industries in finance, there’s still a good share of mortgage brokers who can rip off unsuspecting and uninformed consumers. As such, it’s important to get educated on the secret ways mortgage brokers can rip you off. This first begins with understanding how mortgage brokers make money.
How Mortgage Brokers Make Money
The majority of mortgage brokers and bankers are paid on a commission basis from lenders when a mortgage closes. Once the lender provides the mortgage to the client the mortgage broker will receive a small commission in exchange for arranging the deal.
The commission a broker receives varies from lender to lender. However, typical compensation for mortgage brokers ranges between 50 basis points up to 120 basis points of the mortgage amount.
How do you Know if Mortgage Broker is Legit?
There are many ways consumers can stay informed about the status and legitimacy of the mortgage broker they’re planning on working with. Below are a few different ways:
- Check recent Google and Trustpilot reviews
- Request your broker’s mortgage license to confirm they are licensed in your state
- Ask for references
- Check for BBB reviews
These are just some of the most basic ways to immediately check the status and reputation of your mortgage broker. Now let’s check out some of the different ways mortgage brokers can rip you off throughout the mortgage process.
- Running Your Credit Without Your Consent
- Charging an Application Fee
- Rate Dancing
- Rate Snipping
- Placing Hidden Junk Fees
- Loan Flipping
- Failing to disclose Prepayment Penalties
- Failure to distinguish between APR and interest Rate
- Pushy Loan Officers
Running Your Credit Without Your Consent
Mortgage brokers have to first get your consent before running your credit. There are many cases in which consumers simply inquire about the rates on a mortgage and give out their information to brokers only to find out later that the broker ran their credit before getting their consent. As a consumer, it’s important to know when a mortgage broker runs your credit and also the type of credit pull they run as it can have an impact on your credit score.
Charging an Application Fee
One way mortgage brokers can try and rip off consumers is by charging an application fee to simply apply for a mortgage. If you ever come across a situation in which a mortgage broker attempts to charge you an application fee for a mortgage, press them on it. You should never have to pay an application fee for a mortgage.
Rate dancing is a sales tactic used by mortgage brokers who don’t disclose the kinds of interest rates they can provide borrowers until they decide to officially go through the application process. Mortgage brokers should be able to give you an estimate of the kinds of rates they can provide you before you start the official mortgage process.
Rate snipping is another lurky sales tactic used by mortgage brokers who promise you very low-interest rates to get you in the door. These rates tend to be much lower than competitors to entice customers to through them. However, once they officially run your application, credit, and mortgage file, the rate ends up being much higher than the mortgage brokers originally advertised. This is a sales technique that can make customers very angry. So if a rate sounds too good to be true, it’s usually just that.
Placing Hidden Junk Fees
Mortgage brokers are notorious for adding hidden junk fees to your loan. As a borrower, it’s important to be aware of fees that are simply added in for brokers to try and make additional money when they aren’t part of the mortgage costs. Mortgage costs should be covered by the origination fee and the interest rate the lender provides you. Some of the most common hidden fees include:
- Processing Fee
- Mortgage Underwriting Fee
- Recording Fee
If you ever see any of these fees on your loan estimate, ask your mortgage broker to remove them. If they say they can’t, tell them you will go with another lender that doesn’t charge the same fees.
Loan flipping is a tactic used by mortgage brokers to entice you to refinance multiple times for them to make additional origination fees. This practice typically has no net benefit to the borrower and ends up increasing their overall mortgage debt. If you find yourself in a situation where a mortgage broker tries to get you to refinance the same year you got your mortgage because rates have decreased, but there is no significant financial benefit, this is a sign of a rip-off.
Failure to Disclose Prepayment Penalties
Nowadays it’s pretty rare for mortgage lenders to charge borrowers prepayment penalties if they pay off their mortgage earlier. However, in smaller towns and less populated areas, local brokers may fail to disclose important information regarding loans to get people funded. As a borrower, it’s important to be made aware of prepayment penalties if they do exist with your lender.
Failure to distinguish between APR and interest Rate
As a borrower, it’s important to know that your APR and interest rate are not the same. Your APR will always be higher than your interest rate. The APR is a more comprehensive measure of the true cost associated with your mortgage. The APR includes the interest rate, any points charged, mortgage brokers’ fees, and other charges paid to acquire the loan.
Mortgage brokers are legally obligated to disclose and make sure you’re aware of the difference between your APR and interest rate. Some brokers skirt past the APR because it can deter some borrowers from getting a loan. Although your interest rate might look low on paper, your APR can paint a different story. It’s always recommended that borrowers pay close attention to the APR because it provides a more detailed view into the true cost of your mortgage.
Pushy Loan Officers
If you come across a fast-talking silver tongue mortgage broker who seems very pushy, this is a red flag that they may be trying to push you into a mortgage that isn’t the best fit for you. If you notice loan officers using pushy sales tactics like urging you to move quickly on a loan, this is not a good sign.
As a consumer, if you don’t understand certain components of your loan, they need to explain things to you until you fully understand them. Just because they’re in a rush to close a loan, it doesn’t mean you need to be.
Ways to Stay Protected as a Consumer
There are many for you to stay protected as a consumer when it comes to getting a mortgage. Below are some of the easiest ways to make sure you don’t get ripped off by mortgage brokers.
- Compare multiple mortgage brokers
- Fully review a broker’s mortgage license
- Make sure you receive a GFE (good faith estimate)
- Fully review all important loan disclosure documents
Do Mortgage Brokers Sell Your Information?
Believe it or not, most mortgage brokers will sell your information to third-party companies. Some of the most common companies they sell your information to are life insurance companies. Life insurance companies will try and push you to a term insurance policy that covers the mortgage balance on your property in the event of your death. It’s very common to start receiving mail offers from life insurance companies a few weeks following your loan closing. You can fully disregard this information.