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Should I Work With a Mortgage Broker? Pros & Cons of Mortgage Brokers vs Lenders

The Fundamentals of Working with a Mortgage Broker

You’ve probably heard about “mortgage brokers” from people who purchased homes. While consumers do not need a broker to buy property, working with one can certainly make the process easier. In certain circumstances, having a mortgage broker is crucial, especially for self-employed buyers and other non-traditional borrowers. Brokers can provide different loan opportunities you otherwise might not find on your own. In certain cases, they can help you obtain a better rate than working directly with a lender.

Our guide will explain what mortgage brokers do, and how they can help you secure a favorable real estate deal. We’ll discuss the advantages of working with a mortgage broker, the associated fees, and when it’s a good idea to have one. We’ll also talk about the cons of hiring a mortgage broker, and what you should consider before consulting one. Finally, we’ll provide tips on how to find and choose an experienced and reputable broker that can attend to your needs.

What is a Mortgage Broker?

Serving the best mortgage offer.

A mortgage broker works as middleman that connects homebuyers with prospective lenders. They remove much of the legwork from homebuying by recommending loan options you are likely eligible for. Their primary objective is to find the most suitable mortgage product with the most favorable rate that fits your goals. They also guide you throughout the qualification and loan approval process. If you don’t have the luxury of time to research mortgage options, working with a mortgage broker will help simplify the entire process. They basically help originate and close the mortgage deal.

Mortgage brokers collate all necessary documentation, such as your bank statements, employment records, tax forms, etc. They also pull your credit history and confirm your income. They use these information to assist you in applying for loans you qualify for and negotiating terms within a short time. It’s beneficial especially if you need to buy a home within a limited timeframe. Working with a mortgage broker is also helpful if you’re looking to secure specific types of financing, such as government-backed loans. Homeowners can also work with brokers if they want to refinance their mortgage.

Once you’ve decided on an offer, the mortgage broker will coordinate with the lender’s underwriting department. They will work to secure pre-approval for the loan by sending your paperwork. This should setup disclosures and order a home appraisal. The broker will also work with your real estate agent (if you choose to work with an agent) to keep your mortgage arrangements in order up until the closing date. Brokers can work with a brokerage firm or independently on their own.

Shop for Mortgages within a Short Time

If you apply for multiple mortgages within a short period, which is 30 to 45 days, all hard inquiries on your credit record will only count as a single inquiry. But on your own, you might need a longer time to shop for mortgages, which can incur a negative impact on your credit score. If you work within a limited timeframe, you also might not find and compare as many loans as you’d like.

Meanwhile, brokers have lender connections and can deliver within a short time. This usually means your credit score won’t be affected negatively. You also get to compare many loan offers to find a more favorable deal.

How are mortgage brokers different from real estate agents?

Real estate agents and mortgage brokers share similar characteristics. They are both licensed real estate professionals that assist homebuyers. However, a real estate agent’s primary task is to help homebuyers and sellers find or sell property. In contrast, a mortgage broker’s main task is to help buyers find and secure financing to purchase property.

How are mortgage brokers different from loan officers?

A mortgage broker helps you find a suitable loan and connects you to a lender that offers it. On the other hand, a loan officer works directly for a lender, such as a commercial bank. They can assist you in applying for a loan, but can only point you towards loan products their bank offers. Loan officers can also help you with the mortgage application process. They either authorize or recommend loan approvals.

What Are Current Mortgage Rates?

The following table shows local mortgage rates so you can establish a baseline which your broker must beat to justify their fees.

The following table shows current 30-year mortgage rates available in . You can use the menus to select other loan durations, alter the loan amount, or change your location.

The Benefits of Working with a Mortgage Broker

Benefits of talking with a broker.

Getting help from a mortgage broker has several advantages. Besides access to favorable rates and less impact on your credit score, they can assist you in finding specific loans that match your needs. The following are the benefits of working with a mortgage broker:

  • Saves a lot of time. Working with a broker saves you a significant amount of time in shopping for loans. It can take hours to apply for mortgage pre-approval with different lenders. You must also deal with communicating back and forth to keep the application on track. Meanwhile, a mortgage broker can fully focus on shopping for rates on your behalf. They can take care of the preapproval process and take much of the work load off your shoulders. If you do not have time to shop around for mortgages, or if you have a tight timeframe to find a new home, working with a mortgage broker can be a wise move.
  • Helps you find favorable rates. Mortgage brokers have access to wholesale mortgage rates, which are lower than commercial banks with higher overhead costs. Brokers are experienced in making deals, offering valuable insight into the local housing and lending market. They are often well-connected with a range of banks and mortgage companies. Brokers negotiate with lenders on your behalf to help secure a more favorable deal. Consider this an advantage over searching for home loans by yourself.
  • Compare more loan offers. On your own, you might compare around three to five lenders when you do your research. You can do your own work by requesting quotes from several lenders and checking their offers. When you contact your bank’s loan officer, they can only refer you to loans their company provides. Thus, you have to check with other banks as well, which can only take so much. However, with assistance from a mortgage broker, you can have access to a wider selection of loans. You don’t have to do most of the research while they can point you to viable offers. Because brokers have established relationships with lenders, they have a clearer idea of which type of loans can work for you. And with more options, you have better chances of finding a mortgage that suits your needs.
  • Helps match you with a specific lender. Assistance from a mortgage broker can help you identify lenders that provide specific types of loans. For instance, suppose you’re looking to secure a government-backed mortgage such as an FHA loan or a VA loan. Brokers with experience in searching and dealing with these types of mortgages can help secure a favorable deal. They can also walk you through the entire process, remind you of the requirements, and help keep your application on track.

The Best Case to Get A Mortgage Broker

Working with a mortgage broker is most beneficial for homebuyers with unique financial situations. Non-traditional borrowers may have a hard time securing mortgages from lenders. These people are usually self-employed workers or freelancers (non-W2 income borrowers) who have ample incomes but may not necessarily receive them on a regular basis. Borrowers who have inconsistent incomes or less-than-idyllic credit records can highly benefit from mortgage broker assistance.

Brokers are typically more familiar with lenders that provide loans for non-traditional borrowers. Thus, they can help locate the most suitable loan products at favorable rates, according to the borrower’s financial background.

Costs Associated with Mortgage Brokers

Cost associated with mortgage brokers.

Mortgage brokers earn money in two ways. They either get paid a commission by lenders, or the borrower pays the broker (referred to as borrower-paid compensation). Often, they are paid by lenders. The broker fee is a percentage of your loan amount, which is usually 1% to 2%.

Before hiring a broker, ask them directly about their compensation structure. When you pay the broker, you can give the fee as a lump sum amount upon closing. The fee can also be rolled into the amount of your loan. And when the lender pays, the broker’s commission is generally incorporated into the cost of the loan. Note, however, that while lenders typically pay broker commissions, they may carry over that cost to you, the borrower, with higher fees or interest rates. But by federal law, brokers are prohibited from charging fees that exceed 3%.

When you pay the broker. Since the fee takes a small percentage of your loan, note that a larger loan amount will result in a higher fee. For instance, if you took at $500,000 mortgage and your broker charges a 2% flat fee, you’ll end up paying $10,000. This is a hefty sum, which many borrowers might not agree to. In this regard, it’s best to negotiate the broker’s fee to lower your costs. This is also why it’s important to ask them upfront about their fee structure and how much they might charge.

When the broker is paid by the lender. Brokers paid by lenders offer ‘no-cost’ loans, which means you don’t have to pay broker fees. They are technically paid by the lender upon closing. But again, note that the broker’s commission is built into the loan’s interest rate. If the rate is high, you’ll end up paying more over the life of the loan.

If the broker earns commission from a lender, you might be worried they will only point you to loans where they earn the most. In some cases, they might concentrate on loan volume, which takes away from providing quality service. When this happens, you might feel pressured to decide on a loan when you’re not yet sure about your choice. But as it is, mortgage brokers have a responsibility to recommend the best possible loans they can find for your credit situation.

Before anything else, it makes sense to get in touch with several brokers. Ask them about the types of loans and deals they are used to handling. Get a sense of what kind of clients they usually service. You can also check their professional background online. Watch out for reviews that may indicate overcharging on broker fees. Once you find a broker that’s more in tune with your needs, you can choose loans that fit your credit situation.

Moreover, ask your broker about mortgage points, particularly discount points, to know how much you need to pay to reduce your loan’s interest rate. With a lower rate, you can effectively reduce your monthly payments and interest charges over the life of the loan. While it costs extra upfront, it can save you more in the long-term.

Mortgage Brokers are Mandated to Offer Good Service

After the housing crisis in 2008, anti-predatory lending laws such as the Dodd-Frank Act were imposed on lenders. This helps ensure that borrowers are only offered loan options within their means. The law also prohibits brokers from charging hidden fees, fees that are higher than 3% of your loan amount, and fees that are directly associated with your loan’s interest rate. Brokers cannot be paid by both the borrower and the lender, and they cannot obtain kickbacks from affiliated companies.

Consider the Drawbacks

Though working with a mortgage broker has its benefits, this option is not for everyone. If you don’t want to pay broker fees, and if you have time to do mortgage research yourself, then you don’t have to get a broker. Banks also often argue that it’s better to directly transact with them for a mortgage. This is especially advantageous for borrowers who have been with the same bank for many years. Banks contend that transacting with them directly is more secure because they have weighty portfolios.

The following are disadvantages you might encounter when you hire a mortgage broker:

  • It does not promise the best deal. While they can help you find the most favorable rates, working with a mortgage broker does not guarantee the best deal. It also does not mean you will secure the most affordable rate. You will have a lot of options to choose from, but at the end of the day, how your deal turns out will depend on your lender and how negotiations proceed. In some cases, a broker might give you non-local lenders that are not familiar with your area’s special requirements. Meanwhile, you might find a more favorable loan just by working directly with your bank.
  • Not all lenders work with brokers. Though brokers often have connections with different lenders, certain lending institutions do not work with them. And depending on your broker’s connections and experience, they might not have access to loan programs at certain financial organizations. Despite having other options, you might miss the opportunity to secure a loan that better suits your needs.
  • You might need to pay broker fees. If the lender does not provide commissions, you’ll need to pay the broker fee. That’s on top of other housing-related expenses such as the origination fee, appraisal cost, title insurance fee, and so on. Broker fees can be paid upfront or included into your loan. And if you took a particularly large loan, expect broker fees to be a large sum. Meanwhile, even when the broker is paid by the lender, their commission is still built into your interest rate.
  • Less control over your mortgage paperwork. When you hire a mortgage broker, they are in charge of gathering your mortgage documentation. They must also follow up on your applications with different lenders. Depending on your broker, they might not organize your paperwork as thoroughly compared to you transacting directly with a bank. Since you are not talking directly with lenders, this can slow down the process. If you have missing documents, the broker still needs to get in touch with you to fix any issues.
  • Potential for conflict of interest. If a lender pays the broker a commission, the broker may give favors to the lender. If this happens, you might not obtain the best deal. This has been a long-time concern, which is mostly addressed by federal regulations. But in some cases, your mortgage broker may be too focused on loan volume, which sacrifices a level of service. These types of brokers tend to service a lot of other clients. You might feel rushed to choose a loan when you’re not confident about your decision. Thus, it’s best to take your time in choosing a good mortgage broker.

Assess Your Finances, Time, & Needs

Review your financial situation and whether you need a middleman to obtain a mortgage. Do you have a good credit score to secure a conventional loan with your bank? Can you dedicate enough time and effort to shop around for different rates? If so, perhaps it’s better to transact directly with a lender. On the other hand, you might be a non-traditional borrower who is self-employed. In other cases, you may have a low credit score with past credit issues. If this is the case, you’ll likely benefit from a mortgage broker.

Self-employed borrowers or non-W2 income workers find it challenging to secure a mortgage. Lenders usually ask non-W2 workers for additional documentation. Fewer lenders are also willing to service their loans. But with the help of a broker, they can find more lenders that can offer them good deals.

To summarize the pros and cons of working with a mortgage broker, we created the table below:

Pros Cons
Saves a lot of time shopping for different lenders.Does not guarantee the best deal.
Helps borrowers find favorable rates and good deals.Not all lenders work with brokers.
Less impact on the borrower’s credit score.You might need to pay broker fees.
Lender commissions are built into the interest rate.
Lets borrowers compare more loan offers.Less control over mortgage documentation.
Matches borrowers with loans that suit their needs.Potential for conflict of interest. May favor the lender.

How to Find a Mortgage Broker

Man talking to a broker.

Buying a house is one of the most expensive purchases you’ll ever make. So before you hire a mortgage broker, it’s important to do your homework. Research by asking for referrals and checking online for local mortgage brokers. You can start by getting recommendations from family and friends who might have experience with brokers. Also ask your real estate agent for referrals. Some real estate companies come with an in-house mortgage broker. But of course, you are not obliged to take their services if you don’t want to.

Searching online will also point you towards brokers in your area. However, according to the Federal Trade Commission, some lenders may also function as brokers too. If you’ve made a list of local brokerages in your area, it’s crucial to ask about their business model and fee structure. If they happen to function as a lender as well, they might be inclined to offer loan products from their company. This seems counterproductive if you wish to have access to a variety of loan options.

At the end of the day, don’t just believe referrals or online recommendations. It’s important to interview mortgage brokers and ask the right questions. If you have time, try to interview at least three brokers before hiring one. Here’s a list of questions you should ask prospective brokers:

Questions for Mortgage BrokersInsights to Ponder
How long have you worked as a mortgage broker?Gives an idea how experienced they are.
How much do you charge and who pays your fees?Clarifies who shoulders their commission.
How will you be paid?Clarifies the broker’s payment structure.
Which lenders do you work with?If they work with loan providers you need, ex. FHA loans.
What type of borrowers do you usually work with?If they’ve worked with clients like you.
Do you specialize in specific types of mortgages?Consider them if they specialize in a loan you need.
Can you point me to your references?Should be recent clients that can vouch for their service.
Are you a member of any industry association?Being a member adds to their credibility and work ethic.
Are you licensed to conduct business in my state?It’s best to verify before hiring them.
How long do you think it would take to close my loan?Manages your timeframe and expectations.

By conducting an interview, you are gauging the level of experience the broker has. You also need to know if they work with specific lenders that you’re interested in. Ask if they have considerable experience working with borrowers like you, especially if you have a unique financial situation. Lastly, you must confirm if the broker has the appropriate license to service you in your area.

Next, make background checks on their reputation. You can search for reviews online via the Better Business Bureau to know what previous clients have to say about them. The more reviews, the better. Clients can mention if they received the right type of loan they were looking for, and if they got a good deal. They may also mention things such as broker fees and whether or not they had a good experience. If you find any complaints, count that as a red flag. You can search for third-party reviews on Amazon, Yelp, Google, and even Facebook.

It’s vital to get a mortgage broker who can coordinate and communicate effectively. They must answer questions as clearly and timely as possible. Expect them to be professional and responsive to your concerns. Try to gauge whether the broker is a team player or if they seem more concerned with their own business affairs. Your broker and real estate agent also have to communicate properly, otherwise you can end up with a wasted opportunity on a good offer.

Remember, your mortgage deal hinges on positive interactions with the broker and every other party involved in the process. Likewise, to avoid delays, make sure to get back to your broker in a timely manner, especially if they have follow ups on documents and other pertinent concerns. The better the communication, the smoother and more successful your mortgage application will be.

Verify Their License & Affiliations

You can check if a mortgage broker is a member of reputable organizations like the National Association of Mortgage Brokers (NAMB). If they are an independent broker, ask if they are a member of groups like the Association of Independent Mortgage Experts (AIME). You can verify if they are a licensed mortgage broker by searching the National Mortgage Licensing System Registry (NMLS).

In Conclusion

Working with a mortgage broker is advantageous to homebuyers, especially if you have a unique credit situation. A mortgage broker can connect you with prospective lenders that are willing to service your loan. Most non-traditional W2 borrowers, who are self-employed, usually have a hard time finding a lender. But with the help of a mortgage broker, you can access more lenders who specialize in providing specific types of loans for your needs.

Mortgage brokers usually have relationships with a variety of lenders, which allows homebuyers to compare many real estate offers. This can help you find the best rate and deal that suits your credit situation. If you don’t have the time to shop for different lenders, mortgage brokers can do most of the leg work for you. This is highly beneficial if you need to buy a house within a limited timeframe. Brokers can also specialize in finding particular types of loans, such as FHA loans or VA loans.

While there are many advantages to hiring a mortgage broker, take note that it does not guarantee you’ll obtain the best deal. If you have a good credit score and you’ve been with your bank for many years, you might get a favorable mortgage by dealing directly with your lender. Moreover, you have to factor in associated costs such as broker fees, which typically costs 1% to 2% of your loan. Not all lenders also work with brokers, so you might still miss out on certain opportunities.

Before you hire a mortgage broker, be sure to do your research and ask them important questions. Even with a lot of endorsements, you should know more about their background. Ask how much they charge and how they get paid, as well as the type of lenders they work with. It’s also important to know if they’ve worked with clients like you who have a similar financial profile. At the end of the day, you want to hire a professional who is experienced, communicates well, and can help you secure the best deal.

Homeowners May Want to Refinance While Rates Are Low

US 10-year Treasury rates have recently fallen to all-time record lows due to the spread of coronavirus driving a risk off sentiment, with other financial rates falling in tandem. Homeowners who buy or refinance at today's low rates may benefit from recent rate volatility.

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