UPDATED: March 16, 2022
You are buying a house. You have a down payment and need to secure mortgage financing for the reminder of the purchase price. Searching for the best rates and terms for a mortgage loan can be difficult and time-consuming. That’s why some home buyers choose to work with a mortgage broker, the middle person of the home loan market.
The big advantage of securing the services of a broker is convenience. Instead of researching each lender one by one to request a rate quote, a mortgage broker will do the legwork.
Brokers generally receive compensation from the lender that is ultimately selected or from fees paid by the borrower. If you decide to go with a particular mortgage broker, always be sure to calculate your prospective mortgage costs to ensure a full understanding of the fees.
What Is a Mortgage Broker?
A mortgage broker is an intermediary that matches mortgage customers with lenders. Despite their involvement in this process, brokers do not work for lenders, and therefore do not originate home loans themselves.
Mortgage brokers use two separate types of fee schedules: lender-paid compensation and borrower-paid compensation. In some cases, the lender you choose will pay the broker, but other times you may be responsible for these fees. Brokers use many factors to calculate their fee such as the home’s location, the general state of the housing market, interest rates, etc..
When you first meet with a broker, he or she will analyze your current financial situation. This could include an evaluation of your credit score, (learn how to check yours) as well as a review of your income and other important financial characteristics. The broker does this to learn the types of loans that are best suited for you, and apply for loans on your behalf.
What to Ask When Deciding on a Mortgage Broker
Before you select a mortgage broker, you should research if he or she satisfies a number of criteria. You may also consider if you need a mortgage broker at all.
Most home buyers work directly with lenders. Using a mortgage broker has fallen out of favor in recent years, mainly due to the added cost of a middle person, as well as changes that were implemented after the financial crisis in 2008-2009.
But if you prefer a mortgage broker to sort through all the lender options and take care of the work for you, it can be worth the cost. To help you with your decision, there are a few questions you should ask when speaking with a mortgage broker.
What are my Chances at Qualifying for a Mortgage?
Before you start the home buying process, you want to determine if your financial health is set. If your credit is low and you have employment or income issues, high debt payments, bankruptcy or foreclosure, you will want to disclose that information with your broker.
If the broker tells you that you will easily obtain a decent mortgage rate, you may want to think twice. You want to work with someone who is honest. As a result, if your finances aren’t in order, your broker should establish realistic expectations of whether you will qualify for good rates, or even qualify for a loan at all.
What Lenders do you work with?
When you choose a mortgage broker, be aware he or she may work with the same set of lenders. Inversely, others cast a wider scope. Some lenders don’t work with brokers at all, opting to have in-house loan officers. If you want to be thorough, ask your broker this question to see how big their pool is.
Working with a broker makes sense if you’re trying to rate shop across a wide array of lenders. But if your broker only works with a handful of lenders, it’s probably cheaper to do the rate shopping yourself.
What are the Fees?
Mortgage brokers earn money in a number of ways. As independent contractors, each broker you consult may have their own way of charging for their services. That is why it is worthwhile to research how a broker is paid in order to help determine if he or she has a bias toward a certain lender.
For example, if a lender pays a broker for each mortgage he or she brokers, that might be a red flag. The broker may have an inherent bias to steer you to a certain lender even if it may not be the ideal fit for you. Yes, it saves you from paying the broker yourself, but the trade-off may be higher long-term mortgage payments than if you selected an alternative.
Conversely, many brokers are paid by the home buyer. This payment, known as the origination fee, is generally around 1.00% of the loan amount, though it can vary.
For example, if the mortgage loan was $275,000, the fee would be $2,750. Because brokers work on commissions, not salaries, the higher the loan amount, the more they can potentially earn. That means unscrupulous brokers may steer you toward a higher mortgage amount in order to boost their earnings.
Can I speak with past clients?
It is worthwhile to ask this question to see how the broker responds. If there’s hesitation or any sense that he or she is uncomfortable, then they may have something to hide.
If the broker readily supplies a name, number or email, you can be more confident that he or she likely has satisfied clients.
Ken Goffstein, senior lender at Fairway Independent Mortgage Corp. also recommends looking at brokers ratings on Zillow and Good reviews.
Questions to ask a former client include:
How well did the broker communicate throughout the process?
Did the loan close on time?
What were the fees?
Another tip suggested by Goffstein is to meet with at least two brokers before selecting one:
“This is similar to going to another doctor for a second opinion.”
Do You Need a Mortgage Broker?
If you want to obtain the best rates with the least amount of work, a mortgage broker can be a valuable asset to meet that goal. If you feel you have time to do some mortgage loan quote shopping on your own, you can save some money.
“With so many lenders offering online pre-qualification and rate quotes, you may find that there’s no need for a broker,” wrote Nina Semczuk, a Mortgage, Home Buying, Savings and Retirement Expert.
Online lenders such as Rocket Mortgage and SoFi often have lower fees and less stringent approval requirements than their traditional lender counterparts. This, along with the ease of browsing for loans online, makes them well worth any possible mortgage customer’s attention.
The decision to do things alone will save you on a broker fee. It also opens your mortgage options to every lender licensed in your state, not just the institutions a broker works with.