Buyers – Using A Mortgage Broker May Leave You Dead In The Water

If you are thinking about using a mortgage broker for financing or have already been approved through a mortgage broker, you may dead in the water and without a new home come settlement day. And to add insult to injury, you will most likely be in default and may lose your earnest money deposit.

First of all…what is a mortgage broker? A mortgage broker is a company that does not lend their own money. Instead, they outsource the loan to direct lenders who actually have the money and fund the loan. Examples of direct lenders are Wells Fargo, First Horizon, National City, SunTrust and CitiMortgage.

The part of the direct lender that deals with mortgage brokers, gives final loan approval and funds the loan is called the wholesale division.

So why may using a mortgage broker leave you dead in the water come settlement day? Because more and more direct lenders are closing their wholesale divisions and not going through with funding broker's loans even if the loans have already been approved and are supposed to close in the near future.

There are many examples of borrowers that were approved for a loan, but found out a few days before if not on the actual settlement day that their loan was in fact not approved and that they had no financing/money to buy the house. This will most likely put the borrower in default of the contract. Since there is very little recourse a borrower has, it makes it easy for lenders and brokers to do this without fear of anything more than a bruised reputation.

Additionally, Fannie Mae just told lenders that it will probably ban appraisals by in-house employees or those arranged by mortgage brokers (see links below for further details). This means that everything could be moving along "smoothly" and then, two days before settlement, your loan is put on hold because Fannie Mae said that it will not honor the appraisal and that you need to get a new one. This may delay settlement and put you in default of the contract.

Please note that I am not saying that mortgage brokers or the people that work for them are bad, unqualified, incapable or anything of the sort. In fact, I know several loan officers that work for mortgage brokers that are very skilled, knowledgeable, etc. 

What I am saying is that the lending industry and credit markets are changing rapidly and consumers have to be aware of how using a mortgage broker may affect them.

So buyers…make sure you choose your lender wisely because it may be the difference between moving in on settlement day and not having a place to live and being in default of the contract.

Further Reading/Sources:

"Fannie Mae New Rules For Appraisals" – Calculated Risk

"Fannie Proposes Ban on Lenders' In-House Appraisers" – Bloomberg