What is a mortgage broker? In a nutshell, this professional helps you find the best mortgage by shopping all the options at your disposal. This can be a huge plus if you’re feeling overwhelmed by the mortgage process and can’t tell which loan is right for you.
However, mortgage brokers aren’t ideal for everyone, so it’s good to learn what these people do exactly, and what they expect for their assistance (which—surprise!—is not free). Here’s what to anticipate if you embark on your home loan hunt with a mortgage broker by your side.
Benefits of a mortgage broker
Some borrowers might find it easier to just visit their local bank for a home loan, but that can mean missing out on several key benefits that a broker can provide. The primary benefit boils down to choices: While a bank can offer only its own proprietary products and a single interest rate, a mortgage broker acts as a clearinghouse, shopping multiple lenders simultaneously to find different terms and rates on your behalf.
Here’s how this unique professional can pay off for you:
- Savings: “Because a broker works with multiple lenders, they are able to shop all of those lenders for the best price,” points out Nathan Pierce, a mortgage specialist at Advanced Funding Home Mortgage Loans, in Salt Lake City, and a director with the National Association of Mortgage Brokers. This allows you to reap the benefits of lower interest rates and fees.
- Convenience: J.D. Power’s annual Mortgage Origination Satisfaction Study found that customers who considered two or more quotes had a higher satisfaction score than those who got just one. Yes, you can do this on your own, but reviewing and applying to each lender yourself can be a hassle. Brokers streamline the process and do a lot of that legwork for you. For instance, you can fill out just one loan application rather than many, which the broker then distributes on your behalf. And because brokers are pros at acting as liaisons between lenders and home buyers, they often offer better service than working directly with a lender (or lenders). If you have questions you want answered objectively and in plain English, brokers can help big-time.
- Special-case scenarios: Mortgage brokers can be a godsend if you’re a less-than-ideal loan candidate. For instance, if you have spotty income or a poor credit score, this might make it more challenging to find a great loan, or any loan at all. Brokers, however, know which lenders offer more wiggle room on their standards, so if you’re worried your finances aren’t in good shape, this professional could help rescue you.
How much are mortgage broker fees?
Naturally, brokers are not providing all this wonderful service for free. In general, mortgage broker fees amount to around 1% to 2% of the loan borrowed (or $1,000 to $2,000 per $100,000). There are two basic ways that mortgage brokers are paid:
- Lender-paid compensation: This is when the broker is paid directly by the lender that is ultimately chosen to fund the loan transaction. This is a set amount that is agreed upon between the lender and the broker in advance and is basically a commission. While this route seems preferable to borrowers since you don’t pay the broker a dime, keep in mind that you do kind of pay them in the sense that the lender is likely tacking on a bit more interest to your loan to cover the broker.
- Borrower-paid compensation: This is when you, the borrower, pay the broker an agreed-upon fee that becomes part of your closing costs (which you need to pay when you close the deal). Although it hurts because you (rather than your lender) are ponying up the cash, Pierce points out that it is often the cheaper way to go in the long run, because your lender won’t pad your loan’s interest rate to pay your broker.
Make sure you understand your costs upfront by asking your broker for a breakdown of all fees in writing. That way, you’ll be clear on what you pay and won’t be blindsided by more costs at closing.
How to find a mortgage broker
Before you even start the process, verify the mortgage broker’s license status and check the National Mortgage Licensing System to see if any complaints were brought against the broker.
Next, talk to a few mortgage brokers to find out the breadth of their offerings. Check to see if they work with a wide variety of different lenders—a broker has to be approved by each lender, so different brokers might have different programs available. The more the better, as it will widen your access to all kinds of options, including FHA, VA, and conventional loans.
Since they are likely representing multiple products, it’s best to go with someone who has experience, but it’s even more important to make sure that you feel comfortable with your chosen broker—and that the broker carefully and adequately explains everything. Mortgages can be confusing, and you want to be sure you understand the transaction before you commit.
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