5 ways mortgage brokers can rip you off

Mortgage brokers can provide home buyers with an efficient and pain-free path to a competitive loan for the home of their dreams. Unfortunately, not all brokers are created equal.

Some brokers aren’t looking out for your best interest. Instead, they’re using deceptive and quasi-legal tactics to pad their bottom line at your expense.

And borrowers aren’t the only ones harmed by devious brokers.

Honest brokers in the industry are painted with the same brush as their deceptive peers. Ultimately, and by no fault of their own, this reputation impacts their business prospects.

In short, borrowers, honest brokers, and, more broadly, the entire market all benefit from understanding how unscrupulous actors take advantage of the industry.

To this end, following are the top five ways some mortgage brokers can rip you off and how to steer clear of their schemes.

The benefits of using a mortgage broker

Mortgage brokers play an essential role in real estate markets. In fact, there are numerous benefits a broker can offer.

• Expertise: Mortgage brokers have a deep understanding of the home loan market. They can help guide borrowers through the sometimes complex and overly complicated mortgage application process.
• Efficiency: Rather than approaching multiple banks yourself, a broker can save you time by taking on that task.
• Customization: Brokers can help you find custom made lending solutions that may be less widely advertised.
• Access: Brokers can provide access to multiple lenders with whom they have relationships.
• Negotiation: Leveraging the experience of a seasoned negotiator can help you secure more favorable terms with potential lenders.
• Administration: Brokers can take on many of the administrative tasks required during a mortgage application process, relieving you of daunting paperwork.
• Savings: Because of their relationship with different lenders, brokers can often procure special rates that might not be available to you individually.

Five ways mortgage brokers can rip you off

#1 - Yield Spread Premium (YSP) abuse

YSP is a form of rebate lenders pay brokers for loans issued at higher interest rates than a borrower would otherwise qualify for. YSPs aren’t inherently bad; they can provide legitimate compensation for brokers.

But YSPs can also incentivize dishonest brokers to place borrowers into agreements with higher interest rates, even though they qualify for a lower one.

What’s a couple of extra percentage points, you ask? Well, it turns out a lot.

Imagine you worked with a broker and secured a $500K 30-year mortgage at 7%. Excluding taxes, insurance, and other fees, this loan would cost you $3,326 per month.

But what if you actually qualified for a lower rate of 5%. How much would your monthly payment be?

The same mortgage at 5% would cost you $2,684 per month. In other words, you’d pay $642 less at 5% compared to 7%. If we extend the calculation for the life of the loan, the financial impact truly becomes dramatic.

At 5%, a $500K mortgage would cost you $466K in total interest over the life of the loan. At 7%, that exact same mortgage would cost you a mind-blowing $698K in total interest.

Overall, by not providing you the appropriate 5% rate, this mortgage broker would cost you a dizzying $232K, almost a quarter million dollars!

Tip: Confirm with your mortgage broker if they are obtaining a YSP or any type of rebate from the lender. By law, they must disclose any compensation. You should also shop around and compare rates. If one is unusually high, it could be a red flag.

#2 - Fraudulent rates

In some instances, brokers might quote a particular interest rate to help attract a prospective borrower. Later, the broker amends the interest rate, citing a changing market environment.

While markets can certainly change, especially over longer periods, it might be a sign that the broker isn’t acting in your best interest if these amendments are frequent or substantial.

Tip: Request the quote in writing, and if you’re comfortable, lock it in. Rate locks guarantee a particular interest rate for a set period, typically 30 to 60 days. Ensure you keep any documentation of discussions with the broker.

#3 - Pushing adjustable-rate mortgages (ARMs)

Adjustable-rate mortgages (also known as variable-rate mortgages) can be excellent choices for the right borrower at the right time. Unfortunately, some brokers recommend them even when they’re unsuitable.

Regardless of whether a borrower might benefit from an ARM, some brokers will promote them since they can generate higher commissions. In the wrong hands, a borrower with a poor understanding of the product may be surprised by a sharp rise in rates they can’t afford.

Tip: Take the time to understand the pros and cons of adjustable-rate mortgages thoroughly. If a broker is insistent on the product, request a detailed explanation for why they consider it the best fit. Compare the ARM offer with fixed-rate options to ensure you are comfortable with the recommendation.

#4 - Charging excessive fees

Mortgage brokers generate additional income through fees. These include origination fees, processing fees, application fees, or other costs.

Fees are a legitimate component of most financial transactions, but some brokers charge more than is justified. And, they might include unnecessary charges to help inflate their compensation.

Tip: Ask your broker for an itemized list of fees early in the process. The broker should provide this list in the form of what’s called a "Loan Estimate." Take this list and compare it with other brokers and lenders. If anything isn't clear or appears excessive, don’t hesitate to question them.

#5 - Double charging

Beware of instances where the lender and the broker charge you twice for the same service. For example, a lender and broker might charge you for an appraisal when, in reality, only one should.

Tip: Take the time to read the Loan Estimate and Closing Disclosure forms carefully. Within these documents, you’ll have access to a list of the fees you’ll be charged. Make sure you aren't charged twice for any service.

Also, ensure the service's dollar amount aligns with your expectations. If you identify a problem, question it immediately. To be prudent, consider having the documents reviewed by a real estate attorney before finalizing the loan.