The ideal mortgage broker will help you find the loan with the best interest rate for you. But some brokers are far from ideal. Because they get paid a percentage of the loan amount, some dishonest mortgage brokers may try to rip you off. You need to be aware of the tactics dishonest brokers use so you can recognize the red flags and get out of bad situations before you lose money. Most brokers are honest professionals, but it’s important to recognize the bad ones.
After the 2008 housing crisis, many people became wary of mortgage brokers. Many were exposed for taking advantage of their clients and guiding them toward expensive mortgages they could not afford. Unfortunately, brokers engaging in such practices can still be found in some places today.
Even so, getting a mortgage broker could be a good investment for you. Ideally, a broker should make the process of buying a home go smoothly and should help you find a loan that best fits your needs. But you need to know some shady tactics predatory brokers use to get the most money at clients’ expense. Keep reading to learn how a mortgage broker can rip you off, how to know when a broker is doing so, and whether working with a broker is worthwhile.
What is a mortgage broker?
A mortgage broker acts as a middleman between a borrower and a lender to help make the buying process run smoothly. Ethical mortgage brokers collect information from both borrowers and lenders, seek out the best loans for their clients, and carry out real estate transactions. Finding a loan with the best interest and terms can help you buy the home of your dreams, afford the necessary monthly payment, and avoid foreclosure.
There are a lot of advantages to using a mortgage broker, but you need to know the sorts of shady business dealings that less ethical brokers engage in. This way, you can avoid getting ripped off. You should also review and compare brokers to find a good one.
How are mortgage brokers paid?
Mortgage brokers usually get paid a percentage of the loan amount. They are paid by the buyer or lender and receive around 1% to 2% of the cost.
An unethical mortgage broker may accept a high fee from a lender in exchange for getting a borrower to agree to a high mortgage rate. This would mean the borrower pays a higher interest rate than the market norm. Hiring a mortgage broker involves another middleperson in the transaction, which can increase costs. However, some brokers can save you money by helping you find a better deal even when you take into consideration the extra charges.
Ways you can get ripped off on your mortgage
If the interest rate seems too good to be true, it probably is. Interest rates that are significantly lower than the rest of the market are a sign that you could be charged hidden fees. Unethical lenders introduce these fees in a few ways. One way is for the lender to add on additional fees after securing an agreement. Another way is for the lender to tell clients that they no longer qualify for the loan amount originally presented and agreed to.
To avoid falling victim to such fees, have your broker break down all the fees you’re agreeing to and lock in your rate. Make sure you receive a loan estimate with a rate-lock confirmation. This will allow you to compare your lender’s rates with those offered by other lenders.
Steering is when a mortgage broker tries to get the borrower to go for an expensive subprime loan when they meet the requirements for prime loans.
Loan flipping occurs when the lender persuades the borrower to refinance multiple times. This generates fees for the lender each time and can add a significant amount of debt to the borrower. Borrowers gain little to no benefit from continually refinancing their homes.
Adding needless services
Avoid brokers who pressure you to get needless add-ons or services, like single-premium life insurance for a mortgage.
Not disclosing prepayment penalties
Some home loans have prepayment penalties, meaning you receive a penalty for making early payments on your mortgage. It is legally required for prepayment penalties to be listed in loan documents. These penalties usually appear in the fine print. An unethical broker may withhold this information from you, since these penalties, like interest payments, help lenders make money. Look over the documents. If you see a prepayment penalty, ask for a loan that has little or no penalty.
Because prepayment penalties help ensure lenders profit on loans even if they get paid off early, even ethical lenders may offer you better loan terms when you agree to a prepayment penalty. (Ethical lenders and brokers will never withhold information about the fees from you.) Before rejecting a mortgage with prepayment penalties, follow the advice of the Consumer Financial Protection Bureau (CFPB): “Ask your lender for a quote for a similar loan without a prepayment penalty so you can compare total costs and make an informed decision.”
Borrowers save $1,500 on average over the life of a mortgage when they get quotes from two lenders and $3,000 when they compare five quotes.”
How to shop for a mortgage?
If you’re in the market to buy a home, you may be wondering whether, you should try to shop for a mortgage on your own or get the help of a mortgage broker? The answer is yes.
Yes, you should shop online using free comparison tools like the table below. We recommend getting quotes from at least five mortgage lenders. A recent study by Freddie Mac found that borrowers save $1,500 on average over the life of a mortgage when getting two quotes and $3,000 when they compare five quotes.
And, yes, many people will benefit from talking to a mortgage broker when shopping for a mortgage. You may be surprised by what a broker can achieve. This is particularly true if you have bad credit, irregular income, a high debt-to-income ratio, or don’t have enough savings for a down payment.
There really is nothing to lose from shopping for the best mortgage you can by yourself and then seeing if a mortgage broker can do better”
Even if you have great credit and are comfortable doing your own rate shopping, it’s a good idea to find the best rate and terms possible by yourself, and then ask your mortgage broker whether she can do better.
Other scams to be aware of
There are also scammers out there who pose as mortgage brokers in an attempt to con you out of your money. When you interact with these illegitimate “brokers,” here are some scams they may try to pull:
Mortgage wire fraud
These are done by scammers pretending to be escrow officers or lenders. A scammer may also pretend to be a real estate agent. Whatever they pretend to be, they will try to get the potential buyer to send them money for the closing costs. These scams are difficult to undo, and it is hard to get your money back. Always make sure the receiving account is authentic before wiring money. Keep an eye out for the emails and notices you receive from them, and examine these communications closely. If they are riddled with grammatical errors or come from an untrustworthy address, it’s likely a scam.
Fake real estate agents
Unfortunately, there are people out there who pose as real estate agents. These fake real estate agents may create a phony license and work history. To ensure that your real estate agent is legitimate, verify the agent’s number with your state’s Department of Real Estate or Real Estate Commission.
Ways to avoid being scammed
Make sure you get a good faith estimate (GFE)
A GFE comes on an official form issued by the U.S. Department of Housing and Urban Development and lays out the basic information and estimated costs of a loan. A reputable mortgage company will provide you with a GFE soon after submitting your mortgage application. If you do not receive one on the official document or in a timely matter, use a different lender.
Don’t dismiss credit concerns
Having good credit is crucial to earning a mortgage. Any mortgage broker who says otherwise should not be trusted. A mortgage broker who assures you that having a bad credit report doesn’t matter is likely predatory.
Compare mortgage brokers
Take time to do some research and find a trustworthy mortgage broker. Look up reviews, and compare interest rates.
Pros and cons of using a broker
After reading about all these scams, you could be wondering if it’s even worth having a mortgage broker. Mortgage brokers can be a good investment for many people. They do save you a lot of time and help the home buying process go more smoothly. Here are some pros and cons of using a mortgage broker:
Here is a list of the benefits and the drawbacks to consider.
- They do a lot of work for you. One of the biggest advantages of using brokers is that they do some of the work for you. A mortgage broker’s job is to find a mortgage rate with the best terms for you. This is research you otherwise would have to do on your own. Brokers can also answer questions you have about the mortgage industry and help you understand the documents and fees you receive.
- They have more connections. Mortgage brokers have connections with many lenders. Some of these may be lenders you don’t even know about. Brokers can help you find a great mortgage lender. They can also help you avoid lenders who aren’t a good fit for you or might take advantage of you. This could improve your chanced of finding the perfect home loan for you.
- Some fees could be avoided. Many fees come with getting a mortgage. Most borrowers have to pay an appraisal fee, application fee, upfront fees, and origination fees. Some brokers can work with a mortgage lender to get at least some of these fees waived, which can save you a lot of money.
- They may put their needs first. Your goal should be to find the most affordable mortgage loan. If your broker is not taking your needs seriously and is just trying to maximize the commission, you could end up with mortgage payments you can’t afford or monthly payments you can’t meet.
- Broker fees may apply. Brokers are paid by lenders or borrowers. If the lender pays for the broker, be sure that the broker isn’t steering you toward a more expensive mortgage. If you’re planning to pay for the broker, calculate how much it will cost to see if it is worth the money.
FAQ about how mortgage brokers rip you off
What should I not tell my mortgage broker?
First and foremost, you should be completely truthful with your lender. Do not lie about any felonies or your credit history, and be honest about your financial situation. Deception could lead to mortgage fraud. Some people recommend not disclosing any irresponsible spending habits you have, as it can make getting a deal difficult.
Is it worth using a mortgage broker?
There are definitely major advantages to using a mortgage broker. An ethical mortgage broker saves you a lot of time, work, and money. They may be able to get you a better deal on a mortgage than you could get on your own. They also understand the mortgage process and can help answer questions you have. Do your research beforehand, and it may be worth using a mortgage broker.
How do I know if my mortgage broker is bad?
The biggest sign of bad brokers is that they try to steer you toward mortgage payments you can’t afford. Do some market comparisons to make sure they’re not ripping you off. Also, be sure to know which additional fees are necessary and which are useless so you know if they’re just trying to up their commission or not.
- A good mortgage broker will help you find the best deal. A predatory broker will try to add on unnecessary costs to get more money from you.
- Mortgage brokers make money off of a percentage of the loans sold.
- Be aware of hidden fees, steering, loan flipping, and prepayment penalties.
- Do your research beforehand to make sure you’re working with a good, trustworthy broker.
- There are a lot of advantages to using a mortgage broker, but the wrong one can end up ripping you off. Greedy brokers with weak ethics may use hidden fees, try to sell you unnecessary add-ons, or avoid giving you necessary loan documents.
- Be aware of the unsavory practices these brokers use. By knowing what to look for, you can avoid being ripped off.
View Article Sources
- § 1024.7 Good faith estimate — Consumer Financial Protection Bureau (CFPB)
- Can I be charged a penalty for paying off my mortgage early? — CFPB
- Mortgage Brokers: Reviews & Comparisons — SuperMoney
- Good Faith Estimate (GFE) form — U.S. Department of Housing and Urban Development (HUD)
- Why Are Consumers Leaving Money On The Table? — Freddie Mac
- How Much Do Mortgage Brokers Make? — SuperMoney
- Is my broker being paid for getting me a mortgage loan? — CFPB
- Life Insurance: Reviews & Comparisons — SuperMoney
- Mortgage Broker Fees: The Complete Guide — SuperMoney
- Mortgage Loan Flipping — Colorado Department of Regulatory Agencies, Division of Real Estate
- Predatory Lending and Flipping — The People’s Law Library of Maryland
- Predatory Lending Practices Hearing Transcript 24 May 2000 — U.S. House of Representatives, Committee on Banking and Financial Services
- The Ultimate Guide to Credit Reports — SuperMoney
- What is a prepayment penalty? — CFPB
- What Is A Subprime Mortgage? — SuperMoney
- What is the ability-to-repay rule? Why is it important to me? — CFPB
- What is the difference between a mortgage broker and a mortgage lender? — CFPB
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.