How a mortgage broker can save you time and money!
Buying a home is the biggest purchase most people will ever make. It can be the most nerve-wracking, too, because getting a mortgage and closing the loan can be a long, complicated process.
A mortgage broker can take the stress out of the mortgage process. From finding the best interest rate and lowest fees to completing the application and closing the loan on time, a mortgage broker is well-versed in the whole process. Working with a mortgage broker to navigate today's market can be a wise move, especially for a first-time homebuyer.
What is a mortgage broker?
A mortgage broker is a go-between who matches borrowers and mortgage lenders. If you're buying a home or refinancing, a broker can help you find the best mortgage for your particular needs and situation.
If you're seeking an FHA loan or a VA loan, for example, a mortgage broker who has experience working with those loans can simplify the process for you.
Part of a mortgage broker's job is to assess the borrowers' assets and let them know what size mortgage they can qualify for. A mortgage broker is not a lender of mortgage funds. Brokers originate mortgage loans and place them with lenders, who then disburse the funds at closing.
A mortgage broker has access to more lenders and mortgage products than a bank loan officer, who is limited to the mortgage programs provided by the bank.
How a mortgage broker works
A mortgage broker works with everyone involved in the lending process – from the real estate agent to the underwriter and closer at the lender selected – to make sure a borrower gets the best loan and the loan closes on time.
A broker can work independently or with a brokerage firm. Mortgage brokers research loan options and negotiate with lenders on behalf of their clients. A broker can also pull the buyer's credit reports, verify their income and expenses and coordinate all of the loan paperwork.
Many brokers have access to a powerful loan-pricing system, as well, which prices a mortgage loan across many lenders at one time, thereby speeding up and streamlining the process.
How does a mortgage broker get paid?
Mortgage broker commissions or fees are usually paid by the lender after the loan has closed, so working with a broker should not affect how much your loan will cost.
The broker's commission varies, but it typically ranges from 0.50 percent to 2.75 percent of the loan principal. Federal laws cap fees at 3 percent and require that broker fees not be linked to the interest rate on a loan.
That's not to say you never have to pay a fee — some brokers do charge them to borrowers. In these cases, it's a flat fee, usually 1 percent to 2 percent of the loan principal, and it can be paid in a lump sum at closing or rolled into your loan.
Mortgage broker vs. lender
The difference between a mortgage broker and a lender is that a broker doesn't lend the funds for mortgages. Rather, brokers originate and close mortgage loans between lenders and borrowers. Brokers partner with a variety of lenders, including commercial banks, credit unions, mortgage companies, and other financial institutions, and can work independently or with a brokerage firm.
In contrast, a mortgage loan officer who is employed by a bank, credit union, or other lender and is limited to providing the loan products their employer offers. Generally, loan officers assess borrowers and either authorize or recommend approval for loans.
A loan officer at a bank or other lending institution might not be as knowledgeable as a broker. Mortgages are a broker's daily bread, but a loan officer could be handling other types of loans, too, and may not be as familiar with mortgage loans as a mortgage broker is.
In addition, a borrower who gets a mortgage straight from a commercial bank could end up paying more because of the bank's overhead. Instead, a broker might be able to get you a loan with a better rate from the bank's wholesale division.Pros of working with a mortgage broker
- A mortgage broker may be able to get you a lower interest rate and lower fees. Brokers have access to a broader assortment of loans and lenders and may be able to find a better deal than you could get for yourself.
- A broker can save you time. Brokers can do all the research on rates and fees; they negotiate for you and keep the mortgage process on track.
- A broker can save you from making a big mistake. Brokers can help you avoid pitfalls because they know the mortgage industry, the differences among lenders, and the twists and turns in the mortgage process.
- A broker can find the right lender for tricky situations. If your credit history isn't great or the property you're buying is unusual, a broker can find a lender who has more flexibility with credit scores and down payment amounts or who specializes in certain types of properties.
- Not all lenders work with mortgage brokers. Brokers may not have access to all loan programs at certain financial institutions.
- You might have to pay the broker. Before hiring a mortgage broker, ask how they get paid. Usually, the lender pays the broker fee, but sometimes the borrower pays.
- Like bank loan officers, not all brokers are the same. Make sure your broker is highly experienced and comes with great references. Google reviews are always a great way to get a sense of how people feel about the mortgage broker you are looking at.
Questions to ask a mortgage broker
Before you get too far into the process with a mortgage broker, ask these key questions:
- How much do you charge and who pays your fee? The lender usually pays the mortgage broker, but sometimes the borrower pays. Broker fees can show up on the loan estimate or closing disclosure in several ways, so get clear on this ahead of time to avoid surprises at closing.
- Which lenders do you work with? Most mortgage brokers have a stable of lenders they work with, and not all brokers work with the same lenders. If you're eyeing a VA loan and the broker doesn't work with VA lenders, for instance, that broker is likely not the best fit for you.
- How much experience do you have? As a rule of thumb, choose a mortgage broker who has been in the industry for at least three years. If you're interested in a specific type of loan, ask how much experience the broker has with that loan.
- Are you licensed to do business in my state? You can check to see if a mortgage broker is licensed through the Nationwide Mortgage Licensing System and Registry.
- Do you have references? Ideally, you found your mortgage broker through a recommendation from a friend, relative, or co-worker, but if not, it's smart to check references. Ask for names and contact information of several recent clients, then ask them about their experience with the broker. Would they do business with that broker again? Did the loan estimate have accurate information? Were there any issues closing the loan?
- How do you handle rate locks? A rate lock guarantees you the interest rate you're quoted for a certain amount of time, even if rates move up or down. A typical rate lock lasts 30 days or 60 days. If the lender permits, you can add a "float down," which guarantees you a lower rate if rates fall during your lock period. Ask your broker for a loan commitment or preapproval letter from the lender. It should specify the interest rate and points, the date the rate was locked, and when the lock expires.
How to choose a mortgage broker
Finding a mortgage broker requires a bit of homework. You can start by asking your real estate agent, friends, and family for referrals. Read online reviews and check with the Better Business Bureau for complaints, as well.
Ultimately, the burden is on you to find the best mortgage provider, whether through a broker or loan officer and to shop around for the best rate and lowest costs.
Should you work with a mortgage broker?
Borrowers who use a mortgage broker benefit from a more personal experience and have a licensed professional do the legwork for them.
Working with someone you can see face to face and/or someone your Realtor has used in the past and trusts is always a great source.
The effects of the pandemic have had far-reaching effects on the mortgage markets, with many banks limiting their programs, tightening underwriting guidelines, and pulling back on product offerings. This continues to highlight the necessity of working with an experienced mortgage broker to get you into the house of your dreams, smoothly and efficiently.