You’ve narrowed down the search to find your dream home, and now you’re on the hunt for the best mortgage to put those keys in your hand. One way to do it: Work with a mortgage broker who can shepherd you through the intricate lending process from start to finish.
You’ve probably heard the term “mortgage broker” from your real estate agent or friends who’ve bought a home. But what exactly is a mortgage broker and what does one do that’s different from, say, a loan officer at a bank?
Here are answers to five of the most common questions about mortgage brokers.
1. What is a mortgage broker?
Think of a mortgage broker as a middleman between you and potential lenders. The broker’s job is to work on your behalf with several banks to find the loan with the most competitive terms and lowest rate that best fits your needs. People often use “mortgage broker” and “loan officer” interchangeably but they aren’t the same. (We’ll explain later.)
In general, mortgage brokers are licensed and regulated financial professionals who have a well-developed stable of lenders they work with. They do all the legwork — from gathering documents from you to pulling your credit history and verifying your income and employment — and use the information to apply for loans on your behalf with several lenders in a short time frame.
Once you settle on a loan and a lender that works best for you, your mortgage broker will collaborate with the bank’s underwriting department, the closing agent (usually the title company), and your real estate agent to keep the transaction running smoothly through closing day.
2. How does a mortgage broker get paid?
Like most sales professionals, mortgage brokers charge a commission for their services. They typically charge a “loan origination fee,” which is about 1% of the loan amount and is paid by the borrower at closing. Sometimes, though, mortgage brokers negotiate no-cost loans so you don’t have to shell out extra money up front; the broker will instead be paid by the lender after the loan closes. However, choosing a no-cost loan to minimize your out-of-pocket expenses means you’ll pay a higher interest rate, which costs more over time.
So what makes loan officers different from mortgage brokers? Loan officers are employees of a lender and are paid a set salary (plus bonuses) for writing loans for that lender. Mortgage brokers, who work within a mortgage brokerage firm or independently, deal with many lenders and earn the bulk of their money via commissions. The larger the loan amount, the higher the broker’s commission will be.
3. What are the benefits of using a mortgage broker?
For starters, a mortgage broker acts as your personal loan concierge and does all the work for you. The broker applies for loans with different lenders on your behalf, finds the lowest rates, negotiates terms and makes the approval magic happen.
Most mortgage brokers have relationships with several local, regional and even national lenders, and they can tap those connections to get some loan fees waived for you. A mortgage broker will give you accessibility and one-on-one attention you likely won’t find when working directly with a loan officer at a large bank.
Another perk: Some banks and lenders work exclusively with brokers, and that positions you to get qualified for certain loan products if your mortgage broker has a good relationship with those lenders.
You’ll also save time by using a mortgage broker; it can take hours to apply for different loans, and then there’s the back-and-forth communication involved in underwriting the loan and ensuring the transaction stays on track. A mortgage broker can save you the hassle of managing all those daunting details.
4. Are there drawbacks?
It costs about 1% of your loan amount to pay a mortgage broker to shop lenders for you and assist in processing your loan. In other words, if you’re borrowing $300,000, you can expect to pay about $3,000 in loan origination charges to your broker. But if you’re thinking of shopping lenders yourself, keep in mind that it takes a lot of time, effort, communication and savvy to navigate the complexities of the process.
Using a broker can also narrow your access to some large lenders. In the aftermath of the housing collapse, some large banks stepped away from wholesale mortgage lending and stopped working with mortgage brokerage companies.
You can get around this potential roadblock by working directly with an individual lender, especially if you already do your personal banking with that lender. Who knows? You might be able to negotiate better terms and a lower rate. That said, brokers have the ability to comb the marketplace to provide you with a variety of loans to choose from. If you go directly to a bank yourself, you will be limited to the products the bank offers.
If you go your own way, contact at least three lenders; don’t automatically take the first loan offer.
5. How do I choose the right mortgage broker?
The best way is to ask friends and relatives for referrals, but make sure the referring friend has actually used the broker and isn’t just dropping the name of a former college roommate or distant acquaintance. Learn all you can about the broker’s service, communication style, level of knowledge and approach to clients.
Another great referral source: your real estate agent. Ask your agent to give you the names of a few brokers that he or she has worked with and trusts. Some real estate companies offer an in-house mortgage broker as part of their suite of services, but you’re not obligated to go with that company or individual.
To choose the right mortgage broker, it’s wise to interview at least three people to find out what services they offer, how much experience they have, and how they can simplify the process. Don’t forget to check your state’s professional licensing authority to ensure they have current mortgage broker’s licenses in good standing. Also, scope out online reviews or check with the Better Business Bureau to make sure the broker you’re considering has a sound reputation.
If you don’t have the time, patience or know-how to navigate the lending process on your own, talk to a mortgage broker who’s experienced and comes highly recommended. Don’t be afraid to ask questions and learn about each step in the loan process; you’ll walk into your closing with more confidence and satisfaction.