There are times when everyone needs someone on their side. For example, when you’re handling legal matters, you’ll need an attorney, and when you’re buying or selling a house, you’ll usually have a real estate agent. And when it comes to borrowing money to purchase a property, it can help to have a mortgage broker on your side.
But you may not be sure what a mortgage broker is and what a mortgage broker does. Mortgage brokers can be an important part of the home buying process, so it is good to know what they can do for you, what they may cost you, and how to choose a mortgage broker that’s right for you.
What Is a Mortgage Broker
When buying a home, you may work with a mortgage broker. A mortgage broker is a licensed and regulated financial professional who acts as an intermediary between a potential home buyer and potential lenders, who are often financial institutions. A mortgage broker compares mortgage lenders to find interest rates for the buyer.
But most importantly, a mortgage broker will represent your interests in the transaction, which is often the largest purchase that you’ll ever make. A good mortgage broker will get to know you and your family, and try to understand your financial history, your credit profile and your long term goals. Then, the mortgage broker will help you to find the right mortgage product for your needs, and the lender that offers the best rates and terms that you can qualify for.
What Does a Mortgage Broker Do
The first thing that a mortgage broker will do is to find out more information about you and your finances. This will often start with the broker asking your permission to pull your credit history. The broker will also collect documents that you need to apply for a mortgage, including those that verify your employment and income. The broker will review those and other documents that you provide in order to find a mortgage program and lender that fits your needs. A mortgage broker can help you apply for loans and negotiate terms.
Working with the bank’s underwriting department, the closing agent, and your real estate agent, a good mortgage broker will be there to make sure that everyone is on the same page throughout the process, and all the way up until you close on your loan. Their assistance can save you time, and as an experienced professional, your mortgage broker might be able to find you a better rate than you would have found on your own.
How Do Mortgage Brokers Make Money
Mortgage brokers are usually paid by the lenders. It probably won’t be apparent to the borrower, but the lender may be offering the mortgage broker a commission when they refer a new client that closes on a loan.
Other times, mortgage brokers may be paid by the borrowers, which is called borrower-paid compensation. However, the Dodd-Frank Act is a federal law that prohibits mortgage brokers from being paid by both the borrower and the lender at the same time. This law also prohibits mortgage brokers from charging hidden fees or from being compensated based on a borrower’s interest rate.
How Much Does a Mortgage Broker Cost
Mortgage brokers usually don’t cost borrowers anything upfront, as their fees are typically paid by the lenders. This arrangement functions much like the buyer’s real estate agent being paid by the seller, with money being exchanged.
When mortgage brokers do charge borrowers a fee, it’s usually around 1% to 3% of the total loan amount. The total amount varies by the type of loan, the broker, and the broker’s commissions. Their compensation will be dictated by the home prices of the market, but is capped by federal law.
Who Pays The Mortgage Broker
Either the lender or the borrower can pay the mortgage broker, though it is typically the lender. However, the Dodd-Frank Act prohibits the mortgage broker from being paid by both the lender and the borrower.
When Does a Mortgage Broker Get Paid
A mortgage broker’s fees will show up on the borrower’s closing costs sheets presented at closing. A mortgage broker only gets paid after the loan closes and the funds are released. The mortgage broker therefore has an incentive to get the deal to closing, and will do everything within their power to make that process proceed smoothly.
Difference Between Mortgage Lender and Mortgage Broker
A mortgage lender is the party that actually funds the loan. The employees of the mortgage lender are only representing its own interests, not the borrowers. As a borrower, you’ll submit an application to the mortgage lender, and you’ll enter into the loan agreement with the mortgage lender. Mortgage lenders are salaried employees who can only offer the loans that their lender company offers.
On the other hand, mortgage brokers will offer borrowers the option of applying for a mortgage with a variety of lenders. Their job is not to sell you on a particular lender or to select a certain product, but to help you choose the right one for your needs. Mortgage brokers can work within a mortgage brokerage firm or they can work independently.
Should You Use a Mortgage Broker?
Deciding whether to use a mortgage broker is a personal decision that can vary based on each person’s needs and situation. Mortgage brokers have advantages and disadvantages, so it is important to do your research before deciding whether to use a mortgage broker, and who that mortgage broker should be.
Advantages of using a mortgage broker
A Mortgage broker can save you time and effort
While most home buyers will have little, if any experience shopping for a loan, a mortgage broker literally does this all day long. So mortgage brokers can get you access to a wide variety of lenders, including ones you may not know about or cannot access directly by yourself. Instead of researching lenders on your own, a mortgage broker can help guide you and be available to answer any questions. This can be especially helpful for first time homebuyers.
A mortgage broker can give you better access to some types of loans
Some mortgage lenders will only work through mortgage brokers, so that they only receive qualified clients who are already vetted by the mortgage broker. Mortgage brokers may also be able to get you a better rate than you could get on your own. There are also specific kinds of loans that most borrowers may not be aware of, or are only available through mortgage brokers. If one of these unusual products is right for you, you may not even be aware that it exists until you speak with a mortgage broker.
A mortgage broker can save you money
When you get a new mortgage, there can be many fees involved, including origination fees, application fees, and appraisal fees. Mortgage brokers may be able to get lenders to waive some of the fees, which saves you money. But most importantly, a mortgage broker can often help you to find the lender with the lowest rates that you can qualify for, and with the fewest fees. A mortgage broker can also suggest different kinds of mortgages that may be best for you, including those with different repayment periods, adjustable rates and options for first-time home buyers.
Disadvantages
A mortgage broker may not get the best rate for you
A mortgage broker can often get you the best deal, but not always. Some lenders actually offer buyers and brokers the same terms and rates. In the case of borrower compensated mortgage brokers, it’s possible that you may be paying for a service that does not save you any money. It’s always a good idea to shop around on your own to ensure that you’re finding the best available rates.
Mortgage brokers may charge a broker
Mortgage brokers are either paid by the lender or by the buyer. If you are paying the fee, be sure to factor this amount into the overall mortgage costs, so that you are not surprised at closing.
Mortgage brokers often do not guarantee estimates
Mortgage brokers present “good faith estimates” from lenders, which means that the offer is not guaranteed. The mortgage broker thinks that the offer will be very similar to or the same as the final terms of the deal. However, the lender can change the terms before closing after seeing your actual application. The final loan could end up having a higher rate or additional fees.
How To Choose a Mortgage Broker
Referrals from friends and relatives can be helpful in finding a reliable mortgage broker. Your real estate agent can also help you find a trustworthy mortgage broker. Some real estate companies have in-house mortgage brokers, but you are not obligated to use that mortgage broker. You can interview several mortgage brokers to find the best one for you and your needs. It is important to still look into the mortgage broker’s license, reviews, communication style, and level of knowledge.
Bottom line
When you’re going into a transaction that includes hundreds of thousands of dollars, it can help to have some experienced guidance. Using a mortgage broker isn’t for everyone, but there’s a good chance it can save you time and money shopping, applying and closing on your loan. By weighing the advantages and drawbacks of using a mortgage broker, you can decide if it’s right for your needs.