Is it really a good idea to throw another party into the mix as you buy your home? After all, there might already be real estate agents, appraisers, inspectors, attorneys, and other professionals in on the deal.
Everybody plays an important role in the transaction. However, they all have to get paid somehow, and much of that cost is coming directly or indirectly out of your pocket.
Is it a good idea to go to a mortgage broker for your loan instead of directly to a lender? Keep reading to learn about mortgage brokers and decide if using one is the right move for
What Is a Mortgage Broker?
Many people confuse mortgage brokers with mortgage lenders. However, while lenders approve clients and offer mortgages with their own funds, brokers act as the go-between. They bring clients and lenders together, but never fund mortgages with their own money.
Pros and Cons of Using a Mortgage Broker
This begs the question: why bring another party into the deal? Wouldn’t you be able to get a better rate by going directly to a lender? Possibly, but not necessarily. There can be several advantages to working with a mortgage broker.
Let’s look at a few pros and cons of using a mortgage broker to help you understand when one might be useful to you.
Pro: Less Legwork for You
Lenders offer a variety of loan types and terms. The terms offered to you will depend on several factors such as your financial situation. Because even a tenth of a percentage difference in interest rate can mean thousands of dollars over the life of a mortgage, homebuyers should always shop around.
As independent mortgage advisors, mortgage brokers help to cut down on this legwork. In other words, they do some of the shopping around for you. You should always do a bit of your own investigation to ensure they are putting your best interests first, but they can help cut down on a lot of work.
Con: Their Best Interests Are Not Your Best Interests
Though mortgage brokers are supposed to find the best deal for you, unfortunately, they aren’t always incentivized to do that. For example, they may receive a bigger commission from Lender A and offer you that loan even though Lender B has a better deal for you.
Pro: Access to More Lenders/Better Rates
Some lenders work exclusively through mortgage brokers. In other words, they don’t deal directly with borrowers.
Many lenders also offer mortgage brokers better rates because of the volume of business the broker brings them. You wouldn’t be able to get the same deal on your own, so going through the broker is an advantage for you (as long as the broker fees don’t negate the savings).
Con: Access to Fewer Lenders
On the flip side, after the 2008 market crash, some lenders have shied away from working with mortgage brokers. That’s because some lenders found that broker-originated loans were more likely to go into default. So, while hiring a mortgage broker can open some extra options for you, it can also close other doors.
Pro: Fewer Fees
There are a number of fees that lenders charge when originating new loans. These include application fees, origination fees, and appraisal fees. Brokers can sometimes negotiate those fees down or get the lender to waive them. This could save you thousands of dollars!
Con: Broker Fees
Of course, you have to take into account that the mortgage broker has to get paid somehow. Sometimes, you will be directly responsible for paying the fee. You will need to make sure you have enough funds to cover the fee and that it won’t negate the other benefits of hiring a broker.
How do mortgage brokers get paid, anyway? Let’s look at that next.
How Do Mortgage Brokers Get Paid?
There are a couple of ways that mortgage brokers can get their cut. Either the lender pays the broker fee or you do.
If the lender pays a broker commission, make sure the broker isn’t steering you towards a more expensive loan just so they can collect the commission. In order to earn a larger commission, they might not offer you the cheapest option.
If you will have to pay the fee directly, make sure to include it in your calculations. Sometimes the broker can offer you a slightly better deal than what you can get on your own. But the cost of the broker commission can actually make it more expensive.
On the positive side, mortgage brokers don’t get paid until the real estate deal closes. This is an advantage for you because they are incentivized to keep you happy. If you decide you don’t like the options they’re offering, you can choose to forego your mortgage broker’s services and they won’t get paid for the time they put into your case.
What Is the Average Commission Rate for a Mortgage Broker?
Typical mortgage broker commissions will vary depending on which lender you go with, but the commissions can range between 0.5% and 1.2% of the full mortgage amount.
Do Mortgage Brokers Need a Consumer Credit License?
Mortgage broker licensing varies from state to state. However, brokers are typically licensed through the Nationwide Multistate Licensing System & Registry (NMLS).
It’s a good idea to check the licensing requirements in your state to ensure that your mortgage broker has the appropriate licenses.
An easy way to do this is to put your potential broker’s name into the NMLS consumer access website.
How to Find a Mortgage Broker
You can find a mortgage broker through the usual channels. Talk to family and friends to see if you can get any referrals.
The Internet, as always, is a great source of information. Run a search for mortgage brokers in your area. While you’re there, don’t forget to check up on any potential brokers. Read a few reviews, investigate their licenses, and check out their rating with the Better Business Bureau.
Armed with this information, you can meet with a broker to see what they can offer you. But don’t be afraid to do a little shopping around yourself to ensure they are really offering you a good deal.
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