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A Who's Who of Mortgage Brokering
- Borrower – This is you, the consumer. It is essential that you know the basics of a real estate closing in advance. Trying to learn the vocabulary of the industry at the closing is too late. The industry has evolved rapidly with the provision of Internet-based mortgage brokers, as well as direct lenders. At the end of this document is a list of Web sites which provide basic information you'll need to understand about closing proceedings, which disclosures you are entitled to and when, and what your rights are at the real estate closing.
- Mortgage Broker – This middleman brings together a lender and a prospective borrower for a fee. They are usually not a fiduciary or an agent of you, the consumer. Most of the time, they get two fees for a successful real estate closing—one from you, the consumer, at the closing, and a second fee—from the lender—usually called yield spread premium. The HUD-1 Settlement Statement, required by the federal Real Estate Settlement Procedures Act (RESPA), and provided to you at the closing, lists all the costs of the deal, for both you the borrower and the lender. Any yield spread premium that is to be paid by the lender to the mortgage broker is supposed to be listed and will be marked "p.o.c.," meaning paid outside of closing. If there is a chance that yield spread premium is to be paid, the first notice you will get is when the mortgage broker gives you a written good-faith estimate of closing costs" (the GFE) as required by RESPA, within three business days of taking your mortgage loan application. It is usually listed with an acronym, such as "YSP, 0-3 percent." Ask them if the proposed loan involves yield-spread premium. Lastly, the mortgage broker is required by the Act to give you a written loan broker services contract, also sometimes called a retention agreement, which lists the amount of the proposed mortgage, their fee expressed as a percentage of the mortgage, and the time period during which you must work exclusively with them. Mortgage broker fee rates are unregulated by the Act or any other state law. Ideally, they are held down by market forces, but depending on how risky a loan you represent—based on your credit report and credit score—loans are graded A, B, C and D based on this information—you may be looking at a mortgage broker fee of from 1 percent of the proposed loan amount to 10 percent of the loan amount.
B-, C and D loans are called sub prime loans. Sub prime lending is a specialized lending market for consumers with bad credit; many mortgage brokers do not represent sub prime lenders. If you require a sub prime loan, you may have to go somewhere else, or wait until your credit improves. This is in addition to shopping for a good mortgage interest rate.
One more time: Written disclosures which the mortgage broker is required to make to you by a combination of state and federal law are, based on order of timing, loan broker services contract and good-faith estimate of closing costs (GFE).
- Lender – This is the party who funds your loan and controls the lending process. They ultimately control when and if the real estate closing happens. Most mortgage brokers do not have a warehouse line of credit and do not lend their own money. They submit your loan package to several of their lenders. Then the lender, not the mortgage broker, decides whether to fund your loan based on a credit risk analysis of the underwriting package submitted to them on your behalf by the mortgage broker.
Some loans are table-funded, meaning that the mortgage broker is named on the mortgage and promissory note as the lender (creditor), but the money to fund your mortgage actually comes form the lender. The funds are wired to the title company the day of your closing or several days after your closing. Table funding, not specifically discussed in the Act, is not illegal in Indiana at the present time.