If you’re in the market for a new home but don’t have time to wade through scores of applications or shop around for the best mortgage rates and terms, a mortgage broker could be the best friend you’ve never met.
By using a mortgage broker, you are (in theory) partnering with a well-connected pro who will serve as your comparison shopper and negotiator-in-chief – someone whose job is getting you the best deal and steering you through the loan process from start to finish.
The downside, of course, is that mortgage brokers don’t work for free, so hiring a broker adds another expense to the usual costs of buying a house.
Are the services of a mortgage broker worth the cost?
How Brokers Are Paid
Ideally, a broker will save you enough money on interest rates and other transaction fees to more than offset what he or she charges you.
In most cases, you (the home buyer) will pay the broker’s fee (typically 1% to 2% of the loan amount), either upfront or after incorporating it into the mortgage loan.
As a result of the Dodd-Frank Act, mortgage brokers cannot: charge hidden fees; tie their pay to the loan’s interest rate; receive kickbacks for steering you to an affiliated company (e.g., a title company or a home inspector); receive payment from both you and the lender.
The Pros Of Using A Mortgage Broker
Brokers are usually not paid unless the deal closes, so they have a big incentive to find a mortgage with rates and terms meet your needs and desires.
In addition, this means brokers are less likely to take “no” for an answer. For example, if a lender rejects your application, the broker will work hard to help you overcome the obstacles that are standing between you and an approved loan.
The other benefits of hiring a broker are mostly connected with saving – saving you time, frustration and money.
Because the typical broker works with a network of five to 10 mortgage lenders, they can quickly analyze a variety of mortgage products to find the most favorable rates, terms and closing costs.
In addition, brokers often know lenders that offer specialized mortgage programs – e.g., low or no downpayment programs, home renovation programs, etc. – as well as financial institutions that lend to home buyers with less-than-great credit scores.
Obviously, you could do all this legwork yourself, but that might involve dozens of phone calls and face-to-face meetings, not to mention mounds of paperwork – something the mortgage broker will do on your behalf.
A broker will fill out applications for you, negotiate with loan officers and, because they have existing relationships with a variety of lenders, they can also speed up the whole process.
At the very start, a broker will examine your income statements, credit reports, employment history, lists of assets, etc. to determine whether you can afford a mortgage and, if so, what types of rates and terms you’ll qualify for.
Although the broker may approach a number of different lenders, only one mortgage application will have to be completed – the one required by the lender you decide to use. If you approached five different lenders directly, you’d have to fill out five different applications yourself.
A broker should also answer any questions you may have about the process, and can explain the “legalese” featured in the mortgage and the other closing documents.
The Cons Of Using A Mortgage Broker
Every profession has its share of “bad actors,” and the mortgage brokerage industry is no exception.
The fact that Congress felt the need to regulate the field via the Dodd-Frank Act suggests that some mortgage brokers have behaved unethically.
A common complaint is that some brokers are biased. In other words, they steer you to lenders with whom they have cozy relationships, even when the mortgage rates and terms aren’t the best available.
In some cases, unscrupulous brokers do this because it’s the lender that pays their fee (not you), so they have a perverse incentive to direct you to that company. To avoid this scenario, ask who is paying the broker, as well as how much the broker will be paid.
Also, keep in mind that because brokers are not lenders themselves, they aren’t always able to strike the best deals. Sometimes, you can get a better result by negotiating with a lender yourself.
This is because brokers aren’t the ultimate “deciders,” whereas mortgage loan officers may have the ability to waive certain fees, offer more favorable terms and reduce interest rates. Brokers have no direct power to, for example, offer a special deal or make an exception to a standard lending practice.
If you already have a good relationship with a particular bank or loan officer, you may able to negotiate a better deal than a mortgage broker could.
Finally, it may take a bit of time and effort to locate a mortgage broker near you. That’s because the number of licensed mortgage brokers plummeted during the last housing downturn – from about 25,000 in 2006 to just 5,000 in 2013.
On the other hand, if you do locate a broker in your area, he or she is more likely to be a consummate professional. Many of the “get-rich-quick” operators were driven out of business during the last recession.