How to Pick a Colorado Mortgage Broker

A good Colorado mortgage broker is golden, but a bad Colorado mortgage broker can literally send a naïve borrower into foreclosure or, at a minimum, cost the average borrower thousands or tens of thousands in unnecessary fees and/or interest.

Watch for unnecessary application fees and upfront fees

Never do business with a Colorado mortgage broker who charges application fees. Application fees are bunk, so steer clear of a mortgage broker who charges them. Also beware of upfront charges. The only money you should have to spend upfront is for an appraisal and your credit report. I charge my cost for both the appraisal and the credit report. I don't want to receive any compensation from the client until the loan has closed.

Pick a broker who provides a Good Faith Estimate within 3 days of application

Stay away from a broker who doesn't provide a Good Faith Estimate (GFE) in a timely manner. The GFE is required by law to be given to the borrower within 3 days of applying for a loan. However, a good mortgage broker will provide borrowers making serious inquiries with a GFE without the borrower even asking. Even though not required by law, a good mortgage broker will be eager to sit down and go over the GFE with you, sometimes even before you apply for the loan.

Beware of lowball Good Faith Estimates

Beware of brokers who lowball the charges out of the broker's control on the Good Faith Estimate (GFE). Click here to see a sample GFE . The GFE is a document that provides an estimate of all charges likely to be incurred at closing. The mistake that most borrowers make is that they fail to look at the individual numbers and go straight to the "Total Estimated Settlement Charges" which is located near the bottom of the GFE. Many naïve borrowers then compare the "Total Estimated Settlement Charges" on the GFEs provided them by two or three different brokers. You probably guessed it, but a lot of borrowers pick the lowest number and have that broker process their loan.

The problem with this approach is that most of the charges included in the "Total Settlement Charges" are out of the broker's control. The charges in sections 1100, 1200, 1300, 900, and 1000 are charges that having nothing to do with the mortgage broker. These sections contain charges necessary to closing the loan such as title insurance, tax stamps, pest inspection, hazard insurance, and mortgage insurance as well as prepaid taxes and interest. A lot of shady mortgage brokers underestimate these charges knowing that it will make their GFE look fabulous. The truth is that you are going to pay these charges one way or another. Whether the mortgage broker underestimates, overestimates or hits these charges dead on makes no difference whatsoever—except that you are going to get the shock of your life a few days before closing if the charges are underestimated.

Here's what happens to a lot of unfortunate buyers. They get two or three Good Faith Estimates from different mortgage brokers. Broker A's Total Settlement Costs are $8,562. Broker B's Total Settlement Costs are $6,062. And Broker C's Total Settlement Costs are $8,789. Which broker will the borrower most likely choose? You guessed it. Super-shady Broker B will likely get the loan. Of course, Broker B underestimated the closing costs by $2,500. Based on the GFE provided by the broker, the borrower has exactly $6,000 in savings to put towards closing costs.

What happens in this type of scenario is that the borrower will get a call a day or two before closing where a representative from the title company says, "Your closing numbers are wrong. You are actually going to need another $2,500 to close the loan." Ouch. The borrower then borrows the money from a friend or relative or finds it under the couch cushions or asks for an advance on their paycheck. Many times the borrower comes up with the funds, but it's an ugly situation at best. In the worst scenarios the borrower simply cannot come up with the funds, and the loan doesn't close. Misleading a borrower by underestimating the closing costs is unethical, unprofessional and downright slimy, but mortgage brokers do it every day. Brokers who rely on this tactic to get business are also more likely to put a borrower in a bad loan or screw up something due to negligence. Realize that the government will not protect you from an inaccurate Good Faith Estimate.

There is a simple way for the borrower to compare Good Faith Estimates. Simply disregard sections 1100, 1200, 1300, 900 and 1000 of the GFE when comparing mortgage brokers. The only time that a borrower should really be concerned about those sections is when the numbers in those sections are significantly lower on one GFE versus another. Low numbers in these sections indicate that a mortgage broker is trying to pull a fast one. If you disregard the above mentioned sections, you can quickly and easily compare the Good Faith Estimates offered by different mortgage brokers. Another word of advice: stay in close contact with the title agent. Your representative at the title company will be the first to find out when the real fees differ from the fees listed on the Good Faith Estimate. Don't let yourself be a victim of settlement sticker shock.

Don't think that these sections aren't important—they are. The charges in these sections are estimates of what you are going to have to pay at closing, so review them carefully. It's also a good idea to do your own research to make sure that the charges seem right. Quiz your mortgage broker about how he or she calculated those estimates. Also ask your broker for a degree of accuracy guesstimate. A good broker will go through the charges one by one and provide a thorough explanation. One final and very important piece of information: a good mortgage broker will often overestimate these charges—that way the client will be pleasantly surprised when the actual numbers come in slightly lower.

Pick a broker who has a good website

Good mortgage brokers have good websites. The website is the broker's first chance to help a borrower. A broker's website shouldn't just be an easy way to find a mortgage broker's contact information—it should be an information storehouse. If a broker's website isn't brimming with useful information, it's because the broker either isn't trying or doesn't want the borrower to have access to information. In many ways it's easier to work with a client who doesn’t know anything. A lot of brokers are scared to educate borrowers, so their websites are nothing more than Internet business cards. Other brokers are just too lazy to maintain a living website. A good website is almost organic in nature. Fabulous websites require a lot of effort. It's almost like electronic gardening.

How many hours does your broker work?

Are they FULL-TIME or PART-TIME? This is a very important question because, with daily changes in guidelines and interest rates, a part-time broker might not be up to date and end up quoting you bad information. You don't want to come in second to your broker's other job. Just like real estate agents, there are a lot of brokers who do mortgage brokering as a sideline. Mortgages are complex transactions, so make sure to pick a mortgage broker who does nothing but mortgages day in and day out.

Beware of application takers

When you speak to mortgage professionals, listen to what they are saying. If all they are doing is taking an application, my suggestion is to RUN FAST! They should be asking important questions such as:

How long do you plan to own the home?
Have you (and your spouse, if employed) been on your current job for at least 2 years?
Do you have an idea of what your credit score is?
Will this home be your primary residence?
Do you know how long of a lock period you need? Do you have a closing date in mind?
Is the property a single family detached home?
How much money do you have set aside for down payment and closing costs?
Did you earn your down payment money, or was it a gift?
Will your loan amount be less than $417,000?

These questions—and many more—should be asked BEFORE the application is taken. A lot of mortgages "professionals" are nothing more than order takers. Doing business with an order taker could potentially cost you tens of thousands of dollars. Pick a mortgage broker who seeks to learn everything about your situation BEFORE quoting rates or taking your application.

What happens if you get turned down?

There are two types of people who can help you get a loan: mortgage brokers and direct lenders. Mortgage brokers have access to a slew of lenders, whereas direct lenders go to one source for their funds. If you are turned down by a direct lender, you will have to start the entire process over, including having your credit pulled, filling out a new application and re-presenting all your documents. If you get turned down while working with a mortgage broker, however, there is no extra effort required on your part. Your mortgage broker will simply take your loan file to the next lender without skipping a beat.

Pick a broker who is interested in your total financial picture

Let's say that your daughter is getting married and you need to come up with $10,000 cash. You decide to obtain the funds by refinancing your home, and you call a mortgage broker referred to you by a friend and another broker you found by doing a Google search.

Mortgage broker A is thrilled to do a refinance for you. You fill out a mortgage application and start getting your documents together.

Mortgage broker B asks a few more questions. He finds out that you own a vehicle worth $12,000. He looks at the interest rate on your home loan and determines that it might not be the best time to refinance. He suggests that you take out an auto loan on your vehicle instead and forget about refinancing altogether. You are a little embarrassed about the brain block, forgetting that your car was a paid for asset. You have grown so used to driving a paid for vehicle that it never crossed your mind to take a loan against the automobile. In this situation mortgage broker B doesn't make a dime, but he helps you out by giving you some friendly advice—and saving you thousands of dollars in closing costs. Mortgage broker B also knows that you'll come back when the time is truly right to refinance or when you need to purchase a new home.

If the above scenario seems too simple to believe—believe it because it happens every day. Borrowers refinance unnecessarily all the time when a truly simple solution to their problem was right under their nose. The point is that you need to choose a mortgage broker who is concerned about your total financial picture. A good mortgage broker will ask a lot of questions. Most deals are more complicated than the one illustrated above, and most mortgage brokers don't do well when deals get complicated.