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If you’re in the market for a new home, you may not have time to wade through scores of applications. You may not have time to shop around for the best mortgage rates and terms, either. In that case, a mortgage broker could be the best friend you’ve never met. This guide explains how brokers make money and when a mortgage broker is worth it.
By using a mortgage broker, you are (in theory) partnering with a well-connected pro. This person serves as your comparison shopper and negotiator-in-chief. The broker’s 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. As a result, 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 money on interest rates and other transaction fees. Those savings should more than offset what he or she charges you.
A broker usually earns a percentage of the loan amount. That pay comes from either the lender or you (the home buyer), but not both. If you pay the broker, your Loan Estimate shows the amount. If the lender pays, the amount shows up on your Closing Disclosure instead.
The Dodd-Frank Act bars mortgage brokers from tying their pay to the loan’s interest rate. Nor can they receive payment from both you and the lender. A separate law, the Real Estate Settlement Procedures Act (RESPA), bars kickbacks for referring you to a settlement service provider, such as a title company or home inspector.
Pros: Why a Mortgage Broker Can Be Worth It
Brokers usually don’t earn a fee unless the deal closes. That gives them a big incentive to find a mortgage whose rates and terms meet your needs and desires.
In addition, this means brokers are less likely to take “no” for an answer. For example, a lender might reject your application. The broker will then work hard to help you overcome the obstacles standing between you and an approved loan.
The other benefits of hiring a broker mostly come down to saving: saving you time, frustration and money.
A broker typically works with a network of mortgage lenders. So the broker can quickly analyze a variety of mortgage products for the most favorable rates, terms and closing costs.
In addition, brokers often know lenders that offer specialized mortgage programs (low or no downpayment programs, home renovation programs, etc.). The same goes for financial institutions that lend to home buyers with less-than-great credit scores.
Obviously, you could do all this legwork yourself. Doing it yourself might involve dozens of phone calls and face-to-face meetings, not to mention mounds of paperwork. The mortgage broker will do that work on your behalf.
What a Broker Handles for You
A broker will fill out applications for you and negotiate with loan officers. Because brokers 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. That review shows whether you can afford a mortgage and, if so, what rates and terms you’ll qualify for.
The broker may approach a number of different lenders. Even so, you’ll only have to complete one mortgage application: 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. The broker can explain the “legalese” featured in the mortgage and the other closing documents, too.
Click to check your mortgage eligibility.
Cons: When a Mortgage Broker May Not Be Worth It
Every profession has its share of “bad actors,” and the mortgage brokerage industry is no exception.
Congress felt the need to regulate the field via the Dodd-Frank Act. That suggests 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. They do this 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). This creates a perverse incentive to direct you to that company. To avoid this scenario, ask who is paying the broker and how much the broker will earn.
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.” Mortgage loan officers, however, may have the ability to waive certain fees, offer more favorable terms and reduce interest rates. Brokers can’t directly offer a special deal, for example, or make an exception to a standard lending practice.
You may already have a good relationship with a particular bank or loan officer. If so, you may be able to negotiate a better deal than a mortgage broker could.
Finding a Mortgage Broker Near You
Finally, any mortgage broker you find in your area must follow federal qualification rules. Under Regulation Z, each loan officer who works for a broker must be licensed or registered as the SAFE Act requires.
