Working with a Mortgage Broker: How Do They Operate?
If you’ve been looking for a home loan, you’ve most likely heard the term mortgage broker on more than one occasion. But what is a mortgage broker? Can they help you get a better home loan than if you simply went to your bank? Let’s take a look!
Mortgage Brokers Work Independently of Lenders
The function of a mortgage broker is to help guide borrowers through the entire loan process. This means helping you find the mortgage with the lowest closing costs, and the best interest rate.
Mortgage brokers work independently of lenders and banks, and must be licensed in order to operate legally. A broker will usually compare and contrast mortgage options from a variety of lenders to find the specific loan product that best fits their customer’s needs.
In comparison, if you were to walk into a local bank and ask for a loan officer, they would only be able to show you loan products offered by that particular bank or its affiliates, which would substantially reduce the chance that you’d be able to find the best rate. In addition, some mortgage brokers may be able to get you access to special rates due to the fact that they do a large volume of business with a particular lender.
Even If You Use A Mortgage Broker, Do Your Own Research
Just because you’ve hired a mortgage broker to help you through the mortgage search and approval process doesn’t mean you can kick back, relax, and enjoy a margarita on the beach (at least not yet!)
Do preliminary research before you even choose your broker. Look for reviews and testimonials, and if you can’t find them, request them. Not every mortgage broker works in the borrower’s best interest, so it’s wise to shop around. Plus, you should have a good idea of what kind of loan you want before meeting with a broker. For example, if after careful research you’ve determined that a 30-year fixed-rate mortgage is best for you, and a broker firmly recommends a 3/1 ARM, you might want to look for another broker.
Once you do choose a broker, make sure to ask them lots of questions and do in-depth research on any lenders that they mention. After all, you’re still the one who has to live with the mortgage -- they’re just a guide helping you find the best option out there.
What You’ll Need to Bring to Meet With a Mortgage Broker
Just as with a lender, you’ll need to provide a variety of documentation to your mortgage broker. They’ll use this to apply to lenders on your behalf. In most cases, when you meet with your mortgage broker, you should bring:
Documentation of income, such as tax returns or pay stubs
Documentation of assets, including savings, checking, and investment account statements
Your credit report
How Do Mortgage Brokers Get Paid?
While working with a mortgage broker has definite benefits, including the fact that they do the bulk of the work during the mortgage search process, the major downside is the fact that you’ll have to pay them.
Typically, mortgage brokers charge 1% to 2% of the entire amount of the loan. For example, the average broker would charge between $5,000 - $10,000 on a $500,000 loan. In some cases, this fee can be added to the balance of your loan, while in other situations, it must be paid upfront. If the fee is added to the balance to your loan, it will not be charged unless the loan actually closes.
The Dodd-Frank Act: How It Helps Borrowers
For many years, less-scrupulous mortgage brokers were able to get away with some relativity slimy (but still legal) activities when brokering home loans. Fortunately, much of that activity has been cleaned up since the 2010 passage of the Dodd-Frank Act, a federal law that helps protect consumers against unfair and deceptive financial practices.
Before the Act’s passage, lenders could provide payments to mortgage brokers if they got their clients to agree to high-interest mortgages. Today, due to Dodd-Frank, mortgage brokers:
Must tell you all fees and charges upfront
Are prohibited from charging hidden fees
Are not allowed to be compensated based on a loan’s interest rate
Are prohibited from being compensated for referring you to specific affiliates (ex. title companies)
Overall, the Dodd-Frank Act pretty much prevents mortgage brokers from being paid by lenders as well as their clients, which is pretty fair -- considering that the broker is being paid to find the best loan for the borrower, not the best loan for the lender!
You May Be Able to Get a Better Deal On Your Own
In the end, while mortgage brokers can provide a variety of advantages to borrowers, the mortgage consumer has never had more options at their fingertips. With different lending options only a click away, you might not necessarily be getting a better deal by working with a broker. And if you find a better deal at any point before closing, you may want to ditch your broker and go with it. Doing so might be able to save you thousands in broker fees -- a bill that most reasonable homeowners would definitely prefer to avoid.