Who Is Helping With Your Home Loan Decision? Questions to Ask

A home purchase, a refinance or a plan to pay off debt usually involves several professionals, and each one sees the decision from a different angle. A real estate agent, a mortgage lender, a financial advisor and a tax professional may all give input. Knowing what each is looking at, and how each is paid, helps a household weigh the advice it hears.

Key takeaways

• Professionals who touch a home decision have different roles, and how each is paid can shape what they emphasize.
• FINRA suggests asking directly how a professional gets paid, whether by commission, a percentage of managed assets, or a flat or hourly fee.
• BrokerCheck is a free FINRA tool for looking up the work history of people who sell securities or give advice.
• Arriving with a simple list of assets, debts, monthly cash flow and goals helps a professional work on the household's real situation.
• The CFPB recommends requesting loan estimates from at least three lenders, even when someone you trust points you to one.

Different roles, different lenses

A professional who helps with a single transaction tends to look at that transaction: the price, the loan and the closing date. A financial advisor may look at the whole household instead, including cash flow, taxes, savings, insurance and how a loan fits with other goals. One way to describe that wider view is to ask three things about any use of money: how safe is it, how quickly can it be reached, and what does it return?

Neither view is wrong. They answer different questions, and a household making a large borrowing decision often benefits from hearing from more than one.

How the person is paid

Compensation shapes incentives, and the simplest way to learn about it is to ask. FINRA, which oversees broker-dealers, suggests the question "How do you get paid?" It lists common answers such as commissions, a percentage of the assets managed, or flat or hourly fees.

FINRA also advises asking whether the person or the firm will receive any additional compensation for selling you a product. Every pay structure has trade-offs. A commission is typically paid when something is sold, a fee based on assets can grow as assets grow, and a flat or hourly fee does not depend on what is bought. A clear answer is a good sign, and an unclear one is worth following up.

Checking the background

FINRA's BrokerCheck tool provides an overview of an individual's work history and their firm's history for professionals who sell securities, give advice or both. FINRA suggests comparing a professional's answers about disciplinary history with what BrokerCheck shows. Not every professional involved in a home decision appears there, so other licensing records may also be relevant.

What to bring to the first meeting

A professional can work with a household's actual numbers, not just a general description. A short list helps:

• Assets, with approximate amounts and how quickly each could be used.
• Debts, with balance, interest rate, remaining term and monthly payment.
• Monthly income and spending, including what is left over.
• The cash reserve, in months of essential expenses.
• Goals and timing, such as how long the household expects to stay in the home.
• The loan documents, if there is an existing mortgage, including any prepayment terms.

Preparing this list can be useful on its own, since it often shows where cash flow is tight and where there is flexibility.

Questions for an advisor about borrowing

1. How would you compare paying down a loan with keeping the money in reserve or investing it, and what assumptions are you using?
2. What happens to the plan if those assumptions turn out wrong?
3. How would you protect against a job loss or a drop in income?
4. Who will coordinate with my tax professional and lender?
5. Do you receive any compensation that depends on what I choose?
6. Can I have the recommendation and the reasoning in writing?

Comparing lenders even with a recommendation

Advisors, agents and friends sometimes suggest a lender. That can be a useful starting point. The Consumer Financial Protection Bureau advises requesting loan estimates from at least three different lenders and comparing them, including whether rates are fixed or adjustable and what points or fees apply. A comparison shows how a recommended offer measures up.

Taking time

Large borrowing decisions are rarely urgent in the way a sales conversation can make them seem. Time to read documents, ask questions and compare options is reasonable, and a professional who welcomes that is easier to evaluate than one who discourages it.

Common questions

How do I find out how a financial advisor gets paid?

Ask directly. FINRA suggests the question 'How do you get paid?' and lists common answers such as commissions, a percentage of assets managed, or flat or hourly fees. It also suggests asking whether the person or firm receives additional compensation for selling you a product.

How can I check a financial professional's background?

FINRA's BrokerCheck tool provides an overview of an individual's work history and their firm's history for professionals who sell securities, give advice or both. FINRA suggests comparing what a professional tells you with what BrokerCheck shows.

Do I need to compare lenders if an advisor recommends one?

The Consumer Financial Protection Bureau advises requesting loan estimates from at least three different lenders and comparing them. A recommendation can be a useful starting point, and a comparison shows how the offer measures up.

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