Few people have hundreds of thousands of dollars set aside to pay for a house in cash. Instead, most people need to take out a mortgage loan. If you ask your real estate agent, they may recommend a lender they have a good history with. But one of the biggest money mistakes homeowners make is not shopping around for the best mortgage possible.
Thankfully, there’s an alternative to doing all that shopping around yourself that may be able to save you a ton of money — whether you’re buying a new home or looking into refinancing your current home.
You could work with a mortgage broker.
Here’s what you need to know about what a mortgage broker does, so you can decide whether working with one will be the smartest choice for you.
What is a mortgage broker?
A mortgage broker works as a third party that helps connect you with mortgage lenders. You can also think of them as a mortgage advisor or mortgage consultant. They typically have relationships with several lenders. This allows them to find you a lender that meets your needs.
The mortgage broker gathers all the paperwork and makes sure the home loan process moves along through closing. Ideally, they will help you find the best interest rates and loan options for your situation without you having to do all the legwork. Unfortunately, that may not always happen and we’ll explore why in just a bit.
Working with a mortgage broker is different from working directly with a loan officer at a financial institution. Loan officers work for a single company and can provide you mortgages only from that company. This limits your mortgage selection unless you work with several loan officers from different lenders.
4 reasons to use a mortgage broker
1. They can help you understand the mortgage process
Mortgage brokers work with borrowers to help them get a mortgage. Part of this process is helping customers learn how much mortgage they might get approved for and the process to get approved.
Brokers can help you understand what documents you’ll need to provide to get approved for a mortgage and how information such as your credit score or debt-to-income ratio could impact your eligibility. They can also explain why your mortgage may be limited to a certain amount.
If your broker works on commission, their commission may be tied to the size of the mortgage. Although they can help you learn what you may be able to get approved for, make sure that it is an amount you’re comfortable with before moving forward.
2. They may have access to more lenders
Mortgage brokers often work with a variety of lenders. Some brokers also have relationships with lenders that don’t typically work with the public. Due to these relationships, brokers know which mortgage companies to turn to to get the best shot at getting you the best loan, and they may have access to more loan products than you would on your own.
Brokers essentially screen clients and usually only send in loan applications for borrowers they believe will get approved. This helps lenders cut down on applications that don’t lead to mortgages. For these reasons, some lenders rely on referrals from brokers to fuel their business. Without a broker, you wouldn’t be able to get estimates or mortgages from these lenders.
3. They could save you a lot of effort
Without a mortgage broker, you usually have to apply with each lender to get an estimate of the rate you’ll receive and the costs you’ll have to pay to take out a loan. If you want to get several quotes, you’ll have to submit several applications with different lenders. This can take a lot of time and cause a lot of headaches.
Brokers have good working relationships with their lenders. They often have a rough idea of the rates a lender is offering on any given day. Brokers usually know what closing costs to expect and what requirements each lender they work with has. Knowing this information upfront and allowing your broker to shop for you can save you a ton of time and hassle.
4. They might get you lower fees
Lenders are known for charging a long list of fees when you take out a mortgage. These fees are one way lenders can add to their bottom line. These can include application fees, underwriting fees, origination fees, appraisal fees, credit check fees, and more.
Mortgage brokers intimately know the fees lenders charge. They’ll know when they can ask lenders to waive a fee that you may not think to ask about on your own. Because the mortgage broker does some of the work for the lender, the lender may be willing to waive a fee you might not get waived on your own. The volume of business a broker sends a lender may also influence the fees you get charged.
3 reasons to avoid a mortgage broker
1. They might have a conflict of interest
According to federal law, the Dodd-Frank Act, a broker cannot be paid by both the borrower and the lender. But the way mortgage brokers get paid may cause conflicts of interest. If your broker earns a commission from a lender, that commission could influence which lender you get referred to. If lender A has excellent terms but pays a low commission and lender B has decent but worse terms and pays a higher commission, the broker may refer you to lender B to get a bigger paycheck.
Because brokers on commission may get paid a percentage of the loan amount, they may also try to get you to take out a larger loan than you’d take out otherwise. This could put your finances in jeopardy for them to receive a higher paycheck.
2. They might charge a broker fee
Some mortgage brokers may charge you a fee for their work. This should not be a hidden fee — it should be disclosed upfront so you understand what it is.
Because lenders working with brokers usually experience a smoother process, you may get a discount on your loan by going through a broker. But if the lender you use doesn’t offer a broker discount and you have to also pay a broker fee, then you may end up paying more for your mortgage than if you applied through the lender directly without the broker’s help.
3. They might have less access to lenders
Believe it or not, some lenders don’t want to work with brokers to get more business. A lender may not want to pay the commissions and fees brokers might charge. Other lenders may not want to deal with the hassle of working with non-employees to originate mortgages.
Whatever their reasons, these lenders won’t be accessible to you if you solely work through a broker. For this reason, it may still make sense to do some rate shopping on your own in addition to the offers the mortgage broker sends you. This way, you can make sure you’re getting the best overall deal.
How to choose a mortgage broker
Choosing a mortgage broker doesn’t have to be complicated. There’s plenty enough to deal with in the home-buying process, especially if you’re a first-time home buyer. However, following a few guidelines can help find the right broker for you:
- Ask for referrals. Ask your real estate agent, friends, and family if they have worked with a mortgage broker they’d recommend. Make sure to ask how the mortgage and application process went before moving forward with contacting the broker.
- Check online reviews. Look for online reviews for the mortgage broker you plan to use. Keep in mind, people usually share grievances more often than praise. That said, recurring problems noted in reviews should make you carefully consider working with a broker.
- Ask about fees upfront. Brokers should be upfront about their fees. It’s important for you to understand these before moving forward. You may also be able to negotiate broker fees.
- Understand communication styles. Some brokers may prefer contact by email and text message, whereas others prefer traditional phone calls. Find a broker who is willing to work with you and your preferred contact method.
- Verify timelines. Meeting deadlines is an essential requirement with real estate contracts. Confirm the mortgage broker can make sure the loan closes on a timeline that matches your needs.
How does a mortgage broker get paid?
Mortgage brokers can get paid in two main ways. Either you pay the broker or the lender pays the broker. Ask your broker upfront how they get paid. They may charge you a flat fee or percentage of the mortgage fee as part of your closing costs. Alternatively, the lender may pay the broker a commission for bringing them business. These payment structures can create conflicts of interest so it is essential to know how your broker is compensated.
Is it worth it to use a mortgage broker?
Using a mortgage broker may be worth it if they can secure you a better mortgage than you can find on your own. As long as you understand how the broker is compensated and that compensation doesn’t result in you getting a worse mortgage, using a broker could save you a lot of time price shopping on your own. However, it’s best to compare offers from a broker with a couple of lenders you checked yourself to verify you’re getting a good deal.
Is it better to use a mortgage broker or bank?
Whether it’s better to use a mortgage broker or a bank depends on your specific situations and the mortgage options offered by both. You can work with both to see who offers a better deal before moving forward with your mortgage loan. In some cases, working with a local bank or credit union instead of one of the big banks may make sense if they’re able to offer a special deal or better mortgage rates.
Shopping around for the best mortgage could be one of the smartest money choices you make, whether you’re looking for a new mortgage to buy a home or to refinance your current one. If you feel the benefits of using a broker outweigh the downsides, a mortgage broker can help you shop for the best mortgage deal.
If, on the other hand, you feel like you’d prefer to handle the task yourself, you can start by checking out our list of the best mortgage lenders.
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