Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Mortgage broker compensation

Dear Dr. Don,
When using a mortgage broker to refinance a 30-year mortgage to another 30-year mortgage, is it common for the broker to receive a "finder's fee" from the purchaser? If so, what is the normal percentage, and how negotiable is this percentage rate?
Thanks in advance,
Tony Thirty-year

Dear Tony,
A finder's fee, paid to the mortgage broker by the originating lender, is just one way that a mortgage broker can be compensated for arranging your refinancing.

A mortgage broker is an intermediary between you and the lender. Like most middlemen, they add a markup to the wholesale cost and then you pay the retail rate.

There's nothing wrong with this arrangement as long as the mortgage broker doesn't cut corners to increase his profit margins and provided that he hasn't priced a huge mark-up in his services.

Michael Larson's Bankrate feature on using a mortgage broker can help you understand how to manage this process. A typical starting point for a mortgage broker is to charge you one point (1 percent of the loan amount) for his services. You may also have to pay an application fee.

Most mortgage brokers don't reveal their compensation until required to by law -- when the loan application has been submitted. The amount of fees and charges that you pay in connection with your loan will be provided on the Good Faith Estimate that the mortgage broker is required to provide you under the Real Estate Settlement Procedures Act.

This disclosure is only an estimate. The final amount will be disclosed on your HUD-1 or HUD-1A Settlement Statement. You are entitled under RESPA to request and receive a copy of the Settlement Statement, with actual closing costs, one day prior to closing.

This is helpful information, but it comes a little too late to help you in comparison shopping or negotiating with mortgage brokers or lenders. A better way to compare lending programs is to use the FTC's online brochure, Looking for the Best Mortgage.

The advantage to using a mortgage broker is that the broker can shop multiple lenders. He's not a miracle worker and can't make someone with a bad credit history magically qualify for a low interest loan. Think of him more as a personal shopper who is helping you find a loan that's right for you.

One good way of keeping your broker honest is to shop rates in your local market using Bankrate. Bankrate's mortgage search feature will provide you with mortgage rates, points and annual percentage rates on loans and can be invaluable in understanding the mortgage market in your community.

If you want to negotiate your best deal with a mortgage broker, you should spend the time and money to know your credit score, review your credit report for errors and correct any errors on your report.

To get a low interest rate, you will need to put your best foot forward. Knowing your credit score will help you understand whether you'll qualify for a lender's best rates. All three of the consumer reporting agencies can provide you with a credit score along with a credit report. I think the best choice of the three is to get your FICO score in conjunction with your Equifax credit report.

-- Posted: Nov. 2, 2001