Were you aware that, in 2023, 0.75% of all mortgage applications contained fraud? As much as shaking hands with a mortgage broker helps you in dealing with the complexities of mortgages, there’s an equal chance of falling into a deep pit!
Some mortgage brokers use tricky tactics to take advantage of people who don't know any better. They can end up ripping off clients who trust them. I’m going to break down the legal ways to deal with such brokers and how you can avoid falling into such traps.
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Mortgage broker rip-offs can lead to severe consequences such as foreclosure and difficulties in obtaining future loan approvals.
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Hidden fees and charges can deplete your finances if you don't have enough funds saved for additional expenses.
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The average sentence for mortgage fraud offenders was 14 months.
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1 in 134 mortgage applications was reported as fraudulent.
Things to remember
The Role of Mortgage Brokers
With the complexities in the current housing market, many homebuyers and homeowners seeking financial advice and guidance turn to a“MORTGAGE BROKER”.
They're intermediaries, more like matchmakers! They bring together lenders and you, the borrower. Usually, they're highly helpful in finding the best deal by connecting you with the right lender based on your financial situation and the interest rates that work for you
NOTE: They don't use their own money to connect borrowers & lenders.
While many mortgage brokers operate with 100% sincerity, there are a few who try to make unethical money out of this partnership by charging hidden fees and more, which we'll be discussing in a few minutes.
So, is this kind of like social service that mortgage brokers do? Definitely not! Let’s see how it’s just another job for them and not a free service.
How Mortgage Brokers Get Paid?
They might work for a brokerage or operate by themselves on an independent basis & get paid in the form of mortgage broker fees either by the buyer (probably you!) or the lender. There are no standard fees and it differs based on the broker you work with.
Their total fee or commission is around 1% to 2% of the mortgage amount. For instance, if you’re getting a mortgage worth $275,000, your mortgage broker fees might come up to $2,750 or $5,500.
7 Ways How Mortgage Brokers Rip You Off
It’s time to accept the hard truth. Not all brokers have your best interests at heart, some might use a few tricky methods to make extra money. Some of these, like the ones below, are really important for you to watch out for.
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1. Hidden Fees
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2. Kickbacks From Lenders
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3. Inflated Interest Rates
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4. Steering Towards Subprime Loans
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5. False Or Misleading Information
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6. Failure To Disclose Information
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7. Prepayment Penalties
Brokers may conceal certain fees or add unnecessary charges to your mortgage agreement. These fees might include processing fees, administrative fees, or inflated closing costs.
Some brokers receive kickbacks or commissions from lenders for steering borrowers toward specific loan products. This can create a conflict of interest, as brokers may prioritize their own financial gain over finding the best loan terms for you.
Brokers may negotiate higher interest rates with lenders in exchange for receiving a higher commission.
FYI - An inflated rate is one that is priced or valued higher than it should be or considered reasonable.
Some shady brokers may redirect a few borrowers towards subprime loans or other risky mortgage products claiming they don't qualify for prime rate loans. But stay aware, subprime loans often come with higher interest rates and fees, as well as more stringent terms.
Brokers may provide false or misleading information about loan terms, eligibility requirements, or your ability to qualify for certain loan programs.
Brokers have a duty to disclose all relevant information about the mortgage process, including potential risks and drawbacks associated with certain loan products. If they aren't willing to do that, it's a red flag for you!
Some mortgage brokers may arrange loans with prepayment penalties, which impose hefty fees if you pay off your mortgage early or refinance. These penalties can trap borrowers in unfavorable loans and make it more difficult to switch to a better loan in the future.
Who Covers Mortgage Broker Fees?
If the lender pays the broker's fee, it might seem like a good deal for you, but it’s not always the best option. The broker could take a higher fee from the lender and, in return, get you a mortgage with a higher interest rate.
This means you might end up paying more money in interest over the entire time you're repaying the loan. So, even though paying the broker might feel like spending extra money, it could actually save you more in the long run if you pay them directly.
💡Pro Tip
When comparing offers from different mortgage brokers, it's crucial to consider factors such as the broker's fee structure, whether it's paid by you or the lender, and the potential impact on your overall loan cost.
Legal Approaches To Dealing With Rip-Offs
If you find yourself in this trap, what's next? How do you deal with it to ensure you don't face serious consequences? Here are a series of possible legal approaches you can take!
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Primarily, you can file your complaint with the state regulatory agency that oversees mortgage brokers. This agency can look into the issue, help mediate between the client and broker, and take action if needed.
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If the problem isn't solved at the state level or if the client has suffered significant financial harm, they might choose to go to court (civil litigation). This means they can sue the broker for damages, asking for compensation for any money they lost due to the broker's actions.
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Moreover, if the broker violates federal lending laws, clients can also complain to federal agencies like the Consumer Financial Protection Bureau (CFPB) for further assistance.
Federal Laws to the Rescue!
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➙Truth in Lending Act 1968 (TILA) is a Federal Law designed to protect consumers when dealing with lenders and creditors. The regulations apply to all types of mortgages as well as credit cards.
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➙The Dodd-Frank Wall Street Reform and Consumer Protection Act is a federal law enacted in 2010 to make the U.S. financial system safer and prevent a recurrence of the excessive risk-taking that led to the 2007-2008 financial crisis.Truth in Lending Act 1968 (TILA) is a Federal Law designed to protect consumers when dealing with lenders and creditors. The regulations apply to all types of mortgages as well as credit cards.
4 Tips To Avoid Mortgage Broker Scams
Now that you know all the possible ways mortgage brokers can rip you off, let’s explore a few ways you can implement to completely avoid such traps and scams.
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1. Know The Broker Fee Structure
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2. Research, Compare & Shop Around
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3. You Review Your Final Mortgage Documents
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4. Get The Opinion Of A Second Broker
Understand the mortgage broker's fee structure by directly asking about their compensation, whether you should pay the fees or they’re going to receive it in the form of commissions from your lenders. Make sure all fees are disclosed upfront and in writing to avoid surprises.
Just like how you look for the best rates and lenders in town, do the same research in finding a mortgage broker. Ensure they are certified and read the success stories of their clients. Have a face-to-face interview with your broker, and check if their fees fit your budget.
Brokers may negotiate higher interest rates with lenders in exchange for receiving a higher commission.
Don't finalize your choices based on just one broker's advice. Get second opinions and check out different mortgage offers. You can talk to a few brokers or even go straight to lenders to see all the options available. This ensures you're getting a fair deal.
The Bottom Line: Choose Your Mortgage Broker Wisely
Choosing a broker to streamline your application is a crucial step in your mortgage journey. Keep in mind that while mortgage rates haven't dropped significantly, they are showing positive signs of improvement by decreasing a few points.
Therefore, we don't have the time and energy to deal with potential mortgage broker rip-offs. Numerous sincere and transparent brokers are available for you to rely on. Cross-check their credibility and past work to ensure you are working with the right mortgage broker.
About the writer
Michael Adams
Reverse Mortgage Expert