A mortgage loan can be obtained in a variety of ways. You can either go to your bank or credit union and use a dedicated mortgage company or an online lender, or you can hire a mortgage broker to handle everything for you. Simply put, mortgage brokers act as intermediaries between borrowers and lenders. They gather all of your documentation and paperwork, then shop around for you using their lender connections—for a fee, of course. Though the use of mortgage brokers has declined in recent years, many homebuyers are reconsidering their options due to the unique value it can provide—particularly for those who are self-employed, do not have a W2 income, or have bad credit.
Important Points to Remember
- A mortgage broker assists buyers in locating the best loan and navigating the process.
- Mortgage brokers, as opposed to conventional loan officers, are frequently paid according to the volume of loans they close; therefore, you should be aware of how this impacts your mortgage.
- Some mortgage brokers advertise "no-cost" loans, but the service is still paid for through the interest rate.
- Make sure to do your homework and conduct a screening interview before hiring a mortgage broker.
What is the Role of a Mortgage Broker?
A mortgage broker has two responsibilities: the first is to assist you in finding the best loan product and rate for your home purchase, and the second is to guide you through the qualification and loan approval process. Brokers shop around on your behalf using their bank and mortgage lender connections network, as well as the wholesale prices they receive for those connections. They'll look for the best loan product for your specific credit, income, and homebuying situation, and they'll work with you to find the lowest possible interest rate. They'll also be in charge of the entire mortgage application process. Your broker will gather all of your documentation, submit all of your applications, and work with your chosen lender to expedite the loan process. When compared to going directly to a lender, a broker can often ensure a faster overall loan process.How is a Mortgage Broker compensated?
Mortgage brokers are compensated in a variety of ways. They are usually paid a commission, which varies depending on the broker and lender. The borrower or the lender pays this commission at the time of closing. Some brokers offer "no-cost" loans, which means the borrower does not have to pay any fees or costs to work with the broker. Although the lender pays the broker's commission at closing, it is also factored into the loan's interest rate, resulting in the buyer paying more over the life of the loan. Mortgage brokers are paid on a per-transaction basis, which is a significant distinction from traditional loan officers. They stand to make more money on each loan they process and will be paid more on larger loans. On the other hand, Loan officers are paid a fixed annual salary, so volume and loan size isn't as important to them.The Benefits and Drawbacks of Using a Mortgage Broker
Working with a mortgage broker has both advantages and disadvantages, as with anything else. One of the most significant advantages of using a broker is that they can frequently locate lenders willing to accept borrowers with poor credit, non-W2 income, and other unusual financial circumstances. The most significant disadvantage of using a broker is that it can be expensive, especially on a large loan. If you borrow $500,000 and your broker charges a 2% fee, you'll owe $10,000 when the loan closes.Pros
- They will handle all of your rate shopping and loan applications for you.
- They aren't constrained by geography and can frequently access local, statewide, and even national lenders.
- Because of their lender relationships, they can often get certain fees waived.
- They help you save time by expediting the application and closing processes.
Cons
- Brokers may use non-local lenders unfamiliar with your region's nuances and special requirements.
- You might not be able to get a loan from a larger lender because many stopped lending wholesale after the housing crash.
- Because your loan file is not handled internally, brokers may have less control over it and how it is processed.
Best Use Cases for Mortgage Brokers
A mortgage broker is often the best option for homebuyers who have unique financial situations (self-employed, have inconsistent or non-W2 income, or have less-than-stellar credit). Brokers are more familiar with lenders who will lend to these non-traditional borrowers and can thus assist them in locating the best loan products and rates available. Brokers can also be beneficial to investors, who are frequently looking for the lowest-rate products possible to protect their profit margins. A mortgage broker can be a good option if you don't have time to shop around for a mortgage (which is a must, given the number of lenders and rates available), or if you need a quick response to your application.Choosing a Mortgage Broker
If you decide that working with a mortgage broker is the best option for your upcoming home purchase, be sure to do your homework. Finding the right mortgage broker necessitates extensive research, and you should never make a decision based on emotion. Before deciding on a broker:- Ask a lot of questions and interview at least three of them.
- Remember that the loan your broker finds you will have an impact on your life for the next 10, 20, or even 30 years.
- Inquire about recommendations from friends, family, and your real estate agent to determine if they are knowledgeable, connected, and capable of giving you the best product for your needs.
- Look up their reputation on the internet and through the Better Business Bureau.
