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Mortgage brokers may be able to find you the loan of your dreams, but you should weigh the potential downsides before hiring one.
Mortgage Brokers: An Overview
When shopping for a mortgage, many home buyers enlist the services of a mortgage broker to find them the best terms and rates. In the wake of the real estate market crash in 2008, however, the business practices of brokers came under scrutiny, and the question of whether they act in customers' best interests was raised.
Working with an experienced, competent mortgage broker can help you find the right mortgage. All the same, there are both advantages and disadvantages to consider before committing to one.
A Broker May Save You Legwork
Mortgage brokers have regular contact with a wide variety of lenders, some of whom you may not even know about. A broker also can steer you away from certain lenders with onerous payment terms buried in their mortgage contracts.
That said, it is beneficial to do some research of your own before meeting with a broker. An easy way to quickly get a sense of the average rates available for the type of mortgage you're applying for is to search rates online, then use a mortgage calculator. Tools like this will let you compare rates easily and provide you with extra knowledge when assessing a mortgage broker's credibility.
A Broker May Have Better Access
Some lenders work exclusively with mortgage brokers and rely on them to be the gatekeepers to bring them suitable clients. You may not be able to call some lenders directly to get a retail mortgage. Brokers may also be able to get special rates from lenders due to the volume of business generated that might be lower than you can get on your own.
- Working with a mortgage broker can save you time and fees.
- Cons to consider include that a broker's interests may not be aligned with your own, you may not get the best deal, and they may not guarantee estimates.
- Take the time to contact lenders directly to find out first hand what mortgages may be available to you.
A Broker May Be Able to Manage Your Fees
Several different types of fees can be involved in taking on a new mortgage or working with a new lender, including origination fees, application fees, and appraisal fees. In some cases, mortgage brokers may be able to get lenders to waive some or all of these fees, which can save you hundreds to thousands of dollars.
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A Broker's Interests May Not Align With Your Own
Your ultimate goal in shopping for a mortgage is to find one with an affordable interest rate and low fees. You are in it for the long haul. A mortgage broker, on the other hand, often gets a fee from the lender for bringing in the business. This fee can be based on the amount of the mortgage and will vary among lenders. A broker's goal, therefore, is to get you into a mortgage that maximizes their compensation. The 2008 market crash revealed that many brokers were getting their clients into mortgages that they could not afford over time.
A Broker May Not Source the Best Deal for You
Many home buyers simply assume that a broker can deliver a better deal than they could get on their own, but this is not always the case. Some lenders may offer home buyers the very same terms and rates that they offer mortgage brokers (sometimes, even better). It never hurts to shop around on your own to see if your broker is really offering you a great deal. As mentioned earlier, using a mortgage calculator is an easy way to fact check if your broker is offering you a good deal.
You May Owe a Broker Fee
Mortgage brokers are paid either by the lender or by you. If the fee is covered by the lender, you need to be concerned whether you might be steered to a more expensive loan because the commission to the broker is more lucrative. If you pay the fee, figure it into the mortgage costs before deciding how good a deal you are getting. And be sure to settle all fee issues upfront before you sign anything or start working with a broker.
Spend some time contacting lenders directly to obtain an understanding of which mortgages may be available to you.
Brokers Often Do Not Guarantee Estimates
When a mortgage broker first presents you with offers from lenders, they often use the term "good faith estimate." This means that the broker believes that the offer will embody the final terms of the deal, but this is not always the case. In some cases, the lender may change the terms based on your actual application, and you may end up paying a higher rate or additional fees.
Some Lenders Do Not Work With Mortgage Brokers
This is an increasing trend since 2008, as some lenders are finding that broker-originated mortgages were more likely to go into default than those sourced through direct lending. By working through a broker, you may not have access to these lenders, some of whom may be able to offer you better mortgage terms than you can get through the broker.
What Is a Mortgage Broker?
A mortgage broker is an intermediary between a financial institution that offers loans that are secured with real estate and individuals interested in buying real estate who need to borrow money in the form of a loan to do so. The mortgage broker will work with both parties to get the individual approved for the loan. They also collect and verify all of the necessary paperwork that the lender needs from the individual in order to complete the home purchase. A mortgage broker typically works with many different lenders and can offer a variety of loan options to the borrower they work with.
What Does a Mortgage Broker Do?
A mortgage broker aims to complete real estate transactions as a third-party intermediary between a borrower and a lender. The broker will collect information from the individual and go to multiple lenders in order to find the best potential loan for their client. Finally, the broker serves as the loan officer; they collect the necessary information and work with both parties to get the loan closed.
How Much Does a Mortgage Broker Cost?
A mortgage broker may be compensated through a combination of fees paid from borrowers and commissions that are paid out by the lending institutions who want them to originate loans. The costs vary greatly but a mortgage broker generally earns between 1% and 3% of the total loan amount. The total amount paid by the borrower will vary based on the type of loan, what broker is used, and how much the broker is earning in commissions from the lending institution.
A mortgage broker’s pay could show up on your closing costs sheet in a variety of ways. They may charge loan origination fees, upfront fees, loan administration fees, a yield-spread premium, or just a broker commission. When working with a mortgage broker, you should clarify what their fee structure is early on in the process so there are no surprises on closing day.
When Does a Mortgage Broker Get Paid?
A mortgage broker typically only gets paid when a loan closes and the funds are released. Some lenders pay mortgage brokers based on their own accounting schedules, which can be up to 30 days after the closing of the loan. The majority of brokers don’t cost borrowers anything up front and they are generally risk-free. However, they will check your credit to see what type of loan arrangement they can originate on your behalf.
When Should You See a Mortgage Broker?
You should use a mortgage broker if you want to find access to home loans that aren’t readily advertised to you. If you don’t have amazing credit, if you have a unique borrowing situation like owning your own business, or if you just aren’t seeing mortgages that will work for you, then a broker might be able to get you access to loans that will be beneficial to you. Many individuals prefer to work with a broker regardless of their situation because it gets them access to lenders they wouldn’t think to look for. Mortgage brokers may also be able to help them qualify for a lower interest rate than most of the commercial loans that are available.
The Bottom Line: Do I Need A Mortgage Broker?
Working with a mortgage broker can save the borrower time and effort during the application process, and potentially a lot of money over the life of the loan. In addition, some lenders work exclusively with mortgage brokers, meaning that borrowers would have access to loans that would otherwise not be available to them. Brokers can get lenders to waive application, appraisal, origination, and other fees.
It's critical to examine all the fees, both those you might have to pay the broker, as well as any fees the broker can help you avoid, when weighing the decision to work with a mortgage broker.