When Should Homebuyers Work with a Mortgage Broker?
Mortgage brokers, put simply, are middlemen who serve as liaisons between borrowers and lenders. They gather all your documentation and paperwork, and they use their lender connections to shop around on your behalf — at a fee, of course.
Though the use of mortgage brokers has waned over the last decade, many homebuyers are considering this route once again due to the unique value it can offer — particularly for those who are self-employed, have non-W2 income or are dealing with bad credit.
What Does a Mortgage Broker Do?
A mortgage broker has two jobs: First, to help you find the best loan product and mortgage rate for your home purchase, and second, to guide you through the qualification and loan approval process.
Brokers use their arsenal of bank and mortgage lender connections—as well as the wholesale prices they get for those relationships—to shop around on your behalf. They’ll look to find you the best loan product for your unique credit, income and homebuying situation, and they’ll help you home in on the lowest interest rate possible.
They’ll also spearhead the entire mortgage process. Your broker will gather up your documentation, submit all your applications and work with your chosen lender to get your loan processed quickly and efficiently. Often, a broker can ensure a faster overall loan process than going directly to a lender.
How Does a Mortgage Broker Get Paid?
Mortgage brokers can be paid a number of ways. In most cases, they are paid a commission—usually 1 to 2 percent of the loan amount. This commission is paid by the borrower upon closing.
Some brokers offer what are called “no-cost” loans, which means the borrower pays no fee or cost to work with the broker. The lender technically pays the broker’s commission at closing, but it is also baked into the loan’s interest rate — meaning the buyer will pay more over the life of their mortgage.
The big difference between mortgage brokers and traditional loan officers is that brokers are paid on a per-transaction basis. They stand to earn more with every loan they process and get paid more on larger-size loans. Loan officers, on the other hand, get a set annual salary, so they’re not as motivated by volume or loan size.
Pros and Cons of Using a Mortgage Broker
As with anything, there are both advantages and disadvantages to working with a mortgage broker. One of the biggest benefits of using a broker is that they can often find lenders willing to accept borrowers with bad credit, non-W2 income and other unique financial scenarios. The biggest downside to using a broker is that it can be costly — especially on a large-sized loan. If you’re borrowing $500,000 and your broker charges a 2 percent fee, then you’ll owe $10,000 upon closing. Other pros and cons include:
Manage the entire rate-shopping and loan application process for you.
Are not limited in geography and can often tap local, statewide and even national lenders.
Can often have certain fees waived due to their lender relationships.
Save time and offer faster application and closing processes.
Brokers might use non-local lenders who are not familiar with your region’s nuances and special requirements.
You might not have access to larger lenders, as many backed off wholesale lending after the housing crash.
Brokers may have less control over your loan file and how it’s processed, since it is not being handled internally.
Mortgage Broker Best Use Cases
Homebuyers who have unique financial situations (self-employed, have inconsistent or non-W2 income or have less-than-stellar credit) are often best-served by a mortgage broker. Brokers are often more familiar with lenders who will loan to these types of non-traditional borrowers and can therefore help locate the best loan products and rates available to them.
Brokers can also be particularly helpful to investors, who are often looking to protect profit margins with the absolute lowest-rate products possible. If you don’t have time to shop around for a mortgage yourself (a must, given the number of lenders and varying rates out there) or you need to ensure a quick turnaround on your application, a mortgage broker can also be a wise choice.
Picking Your Mortgage Broker
If you do find that a mortgage broker is the best move for your upcoming home purchase, make sure to do your due diligence. Finding the right mortgage broker requires thorough research, and you should never choose yours blindly.
Ask questions, and consider interviewing at least three brokers before choosing who to go with. Remember, the loan your broker finds you will impact the next 10, 20 or even 30 years of your life. Make sure they’re knowledgeable, connected and equipped to give you the absolute best product for your needs, and ask friends, family and your real estate agent for referrals. Finally, check online reviews and the Better Business Bureau to get a feel for their reputation.