An Upfront Mortgage Broker® (UMB) is one who has elected to do business in an upfront and fully transparent way. The major differences between a UMB and a conventional mortgage broker (MB) are:

1. UMBs disclose their fees to customers in advance and in writing, and disclose the wholesale prices (rates and points) passed through from lenders. Customers of UMBs pay the broker's fee plus wholesale loan prices.

   In contrast, conventional mortgage brokers (MBs) add a markup to the wholesale prices, and quote the resulting “retail prices” to customers. Most MBs reveal their markup only in required disclosures after an application has been submitted.

2. The UMBs interests are fully aligned with those of customers. They can thus represent borrowers in shopping for loans. In contrast, MBs shopping the market are often in a conflict situation with customers. For example:
   • The loan type that best meets the customer's needs may not be the one that allows the largest markup for the MB.
   • MBs may profit by ignoring customer requests to lock the rate/points, putting the customer at risk.
   • MBs often increase their markup on customers who allow the rate/points to float by not giving them the best available rate (the float rate) when the loan is finally locked.
3. UMBs credit customers with any rebates they receive from third parties. Mortgage brokers sometimes receive rebates from lenders or concessions from home sellers. UMBs credit customers for any such payments that would otherwise increase the broker’s fee beyond what was agreed upon.

   In contrast, MBs may or may not credit customers for payments from third parties, depending on the circumstances.

Copyright Jack Guttentag 2002

Here are some guidelines for dealing with a UMB:

Your Shopping Focus: When you deal with a UMB, your major focus should shift from shopping the price of the mortgage to shopping for a broker. Once retained, the UMB will shop the market for you. Brokers can shop lenders far better than you, among other reasons, because they are in continuing contact with many lenders.

Don't Be Deceived by Price Quotes: You can ask for a mortgage price quote on the day you interview the UMB, but don't base any decisions on it. The price quote you get from a UMB is unlikely to be the best one you hear, because it will be an honest quote. Honest brokers can't compete with "sunshine blowers" who ensnare consumers by quoting prices they cannot actually deliver. By the time you lock with a sunshine blower, the lower price will have evolved into a higher price. They have a dozen tricks they can use to raise the price once they have you on the hook. Check out Protecting Against Mortgage Broker Tricks.

Keep in mind as well that prices can change every day, and even within the day, so the price quoted, even if honest, will reflect the market only at that point in time. What matters is the price at the time you lock. The UMB will give you the best wholesale price she can find at that time.

Pricing the Broker's Services: For their services, UMBs charge a fee that is negotiated at the beginning. Once set, it won't be changed. You are protected against all the tricks of the mortgage broker trade.

When borrowers deal with conventional (non-UMB) brokers, they usually are not aware of the broker's fee at the beginning because the fee is included in the quoted price. The fee is implicit, not explicit, and the broker is not bound by it. Hence, from the day of the initial price quote to the day the loan closes, you must be on your guard.

The UMB may price in any manner: a fixed dollar amount, a percent of the loan, an hourly charge for the broker's time, or a combination of these. Most brokers, however, charge a percent of the loan amount.

The UMB's fee will typically be a significant 4-figure number. You shouldn't let that faze you. For one thing, the UMB is going to pass through directly to you the wholesale rates received from lenders. These rates typically are about 3/8% below the retail rates quoted by lenders. This is the equivalent of an upfront charge of about 1.5 points, or 1.5% of the loan amount. In many if not most cases, this saving will completely cover the UMB's fee. Furthermore, the UMB can save you a lot of money in other ways. Read Why Select an Upfront Mortgage Broker®.

Bear in mind that a one-point fee is $5,000 on a $500,000 loan but only $500 on a $50,000 loan. Hence, if the UMB's fee is expressed in points, expect it to be higher on smaller loans. You should also expect to pay more if the UMB anticipates that you will be a "tough case" -- for example, you have credit problems that must be cleared up or you can't document your finances.

Other Factors in Selecting a UMB: In selecting an UMB, price is not the only consideration – anymore than it is in selecting a physician, a lawyer or an architect. You should feel free to query the broker about qualifications and experience. If their price seems high, ask why they consider their services to be worth that much. Broker fees (all brokers, not UMBs) average about 2% of loan amounts, though it is smaller on large loans and higher on smaller loans.

It's also good to have referrals but these  are not easy to come by in the home loan market, except from real estate sales agents.  Sales agents select their brokers largely for their reliability.  A UMB referred by a sales agent would be a good bet.  Even if the referred broker is not a UMB, the broker might deal with you on UMB terms.

Be Prepared: UMBs may want to have information about the transaction before quoting a price. The information may be provided in an interview, a questionnaire, or in some other way. Borrowers can facilitate the process by arming themselves beforehand with basic information about the deal.

If they have purchased or contracted to purchase a house, they should bring the documents evidencing the purchase.  If they are refinancing, they should bring information on the current status of the existing mortgage, including the loan balance.  In both cases, they should bring information on current income from all sources, total available cash, and all current debts including the balance and payment.

The Customers Commitment to the Broker: UMBs deserve upfront customers. Upfront customers don't apply for loans with more than one broker. It is deceitful, it wastes your time as well as the broker's, and it is unnecessary. There is nothing wrong with shopping brokers, but after selecting one you should stick with that broker. If that broker fails to provide adequate service, you terminate the relationship and start anew with another broker.

Consumers dealing with conventional brokers don't know the broker's fee until after an application is submitted, which provides some excuse for submitting multiple applications. (See Is it OK to Submit Two Applications?). But consumers dealing with UMBs know the broker's fee upfront, and therefore have no reason to practice this deceit.

Upfront consumers meet their obligation under a rate lock. When a lender locks the loan, both parties are committed. The lender is committed to delivering the loan even if interest rates jump. The borrower is committed even if rates drop. A borrower who wants to benefit from a lower rate while retaining protection against a higher rate needs to negotiate a “float-down”, as opposed to a lock. A float-down will cost a little more.

Copyright Jack Guttentag 2002-2006

One of the reasons that conventional mortgage brokers conceal their fee as long as possible is a concern that consumers don't fully appreciate the value the brokers provide. Because consumers dealing with UMBs agree on a fee in advance, it is important that consumers also understand exactly what they are getting for their money, and what it might be worth.

In summary:

• Consumers are assured of fair treatment because of pricing transparency, and the absence of conflict between broker and customer.
• Consumers get access to wholesale interest rates posted by lenders, which are about 3/8% below retail rates.
• Consumers receive the benefit of the broker’s expertise and contacts in shopping multiple lenders for the best deal.
• Consumers receive the benefit of the broker’s counsel on the least-costly loan programs that meet the customer’s needs.
• Consumers receive the benefit of the broker’s counsel on methods of overcoming barriers to loan qualification.

Passthrough of Wholesale Prices: The UMB provides access to wholesale prices posted by lenders, as opposed to the retail prices consumers would be obliged to pay if they shopped lenders.

Lenders offer lower prices to brokers because brokers perform costly services for them that they would otherwise be forced to provide for themselves. The most important of these services is finding and servicing customer needs. Absent mortgage brokers, lenders must maintain a costly sales and loan-processing force plus the infrastructure required to support it.

Lenders who operate through both wholesale and retail distribution channels quote wholesale rates on fixed-rate mortgages from .25% to .50% lower than retail rates. It tends to be a little higher on 15-year than on 30-year mortgages, and it varies from lender to lender. The average might be about .375%.

To determine what this is worth in upfront fees, the rate difference must be converted into points. This is an imperfect exercise because lenders vary widely in how they trade off rate against points. But as a rough rule of thumb, a .375% difference in rate is worth about 1.5 points. On an average loan of $130,000, this amounts to $1950.

Assurance of Fair Treatment: Customers of UMBs are not vulnerable to the various “tricks” of the mortgage broker trade. For example, customers who allow the rate and points to “float” with the market until near the closing date often are not given the best deal available because their bargaining power is gone. This does not happen with a UMB.

Shopping Lenders for the Best Price and Service: Mortgage brokers can shop lenders much more effectively than consumers. Brokers are in the market every day, where consumers are in the market a few times during their lives. Brokers receive price information from lenders daily as a matter of course. They know the features of the transaction that affect the price and underwriting requirements. They have relationships with multiple lenders, and are therefore well positioned to find and shop among the lenders offering particular features. And they know the lenders who take 10 days to underwrite a loan and those who take one day.

In addition, price differences between lenders are smaller in the wholesale market than in the retail market. This is because lenders know that brokers are careful and knowledgeable shoppers while most consumers are not.

The potential saving to a consumer from having the UMB do their shopping is very large, especially if they have weak credit. This is illustrated in the table below (drawn from Should Borrowers With Poor Credit Shop?), which shows the high and low rates quoted by retail lenders on a zero-point 30-year FRM in California, for borrowers with different credit ratings. On the day these data were compiled, the potential savings were as large as .625% for A-rate borrowers, and as large as 4.75%. for D-rated borrowers.

Borrower Rating	Lowest Rate	Highest Rate	Spread
A	7.875%	8.50%	0.625%
B	8.99	11.62	1.63
C	9.50	12.00	2.50
D	10.25	15.00	4.75

The actual saving depends on how effectively you would have shopped on your own behalf, if you had elected to do that rather than using an UMB. Only thorough and meticulous shoppers who place no value on their shopping time should disregard this source of value.

Counseling to Determine the Least-Costly Loan Program: Brokers also provide counsel on the loan program that best meets the customer's needs. Usually the customer doesn't realize the full benefit of careful program selection until later, perhaps years later, but sometimes the benefits are reaped upfront. Here is an example provided by a broker.

"This clients had excellent credit but little cash. They were prepared to take a first mortgage for 80% of property value at 8.75% plus a second mortgage for 10% of value at 11%. The weighted average interest rate would have been 9%. But because the client's wife is a doctor, they qualified for a niche loan offered only to doctors. The loan is for 100% of property value, at 8.5% and no points. This saved them .5% in rate."

It is difficult for borrowers to attach value to this, because they typically won't know about it when the UMB's fee is established.

Counseling on Difficult Qualification Cases: Many loan applicants have credit or other problems that pose difficulties in qualifying for a loan. The value added by a broker who finds a way to overcome such problems can be extremely high, though difficult to quantify.

Copyright Jack Guttentag 2002

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product to suit your needs is by talking to us.

• Principal: Repayment on the amount borrowed
• Interest: Payment to the lender for the amount borrowed
• Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.

• Earnest Money: The deposit that is supplied when you make an offer on the house
• Down Payment: A percentage of the cost of the home that is due at settlement
• Closing Costs: Costs associated with processing paperwork to purchase or refinance a house

When You Should Pay Points

        Generally, you should only pay points if you plan on keeping the loan for at least four years. Because points are prepaid interest, you need to be sure you will keep the loan long enough to recoup these costs through lower monthly mortgage payments. If there is a chance you may move within a four year period or if the general interest rate market is declining (increasing the likelihood of refinancing), you should consider a no points or cash back loan.

Tax Issues

        The tax treatment of points depends on what the loan is being used for. If you are purchasing a home, points are generally entirely deductible in the year you buy. This is true even if the seller is paying for your points.

        In a refinance transaction, points must be amortized over the life of the loan. For example, on a 30 year loan, you can deduct 1/30th of the points paid each year. If you refinance for a second time, however, you can deduct the remaining unamortized points in the year you refinance the loan. Consult your tax advisor for more information.

Effect on APR

        A common way to measure loan costs is the annual percentage rate or APR. The APR shows points and costs as an interest rate equivalent spread over the life of the loan.

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