What is a mortgage broker?
Depending on your level of income, financial history and area of interest, certain lending options might be better suited to your situation. With such a wide variety of lenders and mortgage options, it can be difficult to narrow down the best fit.
Navigating the real estate market presents a daunting task for most buyers, which is why some choose to hire a mortgage broker.
What do mortgage brokers do?
When shopping around for a mortgage, a broker acts as an intermediary between you and lenders. Just like a loan officer, they’ll work to identify your specific needs when buying a house, and match you with a lending option that can provide a suitable financing package.
By taking a close look at your credit score, financial history and available funds, brokers are able to estimate your borrowing capacity and recommend mortgage options based on their expertise.
Brokers, as well as loan officers, also act as a liaison throughout the underwriting and approval process. Any relevant documentation that is required is collected by the broker before being passed on to the financial institution.
Advantages of a mortgage broker
Mortgage brokers are a popular option for borrowers thanks to the short- and long-term benefits they can provide. Here’s a look at some of the key advantages to hiring a mortgage broker:
- Might help save you time
- Can provide access to financing options
- Management of fees and expenses
Can help save you time
After building their career in real estate and working with a variety of lenders, brokers, much like loan officers, know a thing or two about mortgages. This expertise carries value, especially when trying to identify the right lender. All of this knowhow can help direct you toward mortgage providers with the best rates, while helping you steer clear of predatory lenders that offer unfair financing plans.
Staying away from toxic contracts will save you serious time and money in the long run, especially if you’re a newcomer to the mortgage process, but it’s still a good idea to do your own market research and get an idea for average rates before hiring a broker.
They’ll also act as a facilitator between you and your lender during the approval process, collecting all the necessary documentation and passing it on along the way, completing functions that loan officers also see through. This could help you stay organized and be better prepared to parse the complicated underwriting process.
Can provide better access
Sometimes, lenders exclusively work with mortgage brokers as a policy. This arrangement allows lenders to benefit from brokers bringing in eligible applicants who are likely to have their mortgage application approved.
Working with a broker could provide access to these lenders, giving you a wider variety of mortgage options to make sure you can find the best rate.
Management of fees and expenses
In some cases, mortgage brokers can work on your behalf to reduce some of these fees or possibly have them waived completely. Origination fees, appraiser commissions and other expenses can sometimes be negotiated to a smaller amount, potentially saving you money when it’s time to pay closing costs.
Disadvantages of a mortgage broker
Opting to work with a mortgage broker does have its advantages, but they’re definitely not for everyone. Here are a few reasons why you might skip hiring a broker for your home purchase:
- Usually can’t guarantee loan estimates
- Might have conflicting interests
Usually can’t guarantee loan estimates
When you meet with a mortgage broker, they’ll help you get a better idea of what you can afford by presenting you with a lender's offer, known as a good faith estimate.
A “good faith estimate,” or GFE, outlines the expected fees, interest rate and loan amount on a mortgage if it is approved. While these provide fair assessments of what you can expect to pay, they are not guarantees.
Having a rough idea of what you’ll pay can be helpful, but there’s always room for unexpected costs throughout the homebuying process. What you end up paying could be higher or lower than the estimate your mortgage broker provides.
Might have conflicting interests
Since mortgage brokers are paid by the lender for bringing in new business, they aren’t always obligated to serve your interests as the buyer. A broker’s commission is taken as a percentage of the overall loan amount, so they may be inclined to recommend a lending package that requires you to pay more than necessary.
Your number one goal when buying a home should be finding an affordable mortgage with a manageable interest rate. Brokers may not always offer you the best deal upfront, so it’s a good idea to meet with multiple lenders and get a better sense of what you can afford.
A mortgage calculator can also help narrow down options and understand your buying power.
Cost of hiring a mortgage broker
Commissions or fees associated with hiring a mortgage broker are usually paid by the lender. This means hiring one of these professionals probably always won’t add to the cost of securing a loan. According to Investopedia, these commissions can range from 1%-3% of the mortgage’s total.
Occasionally, buyers are required to pay some fees to their mortgage broker as part of the closing costs, but this can vary depending on who you choose to work with. When meeting with a mortgage broker, it’s important to discuss their payment structure up front, so there aren’t any expensive surprises when your loan is closed.
Mortgage broker vs. loan officer
Mortgage brokers are often confused with loan officers. They both perform similar services, but a loan officer is employed by a single financial institution, such as a bank or mortgage lender, while a broker works on the borrower's behalf to find an ideal lender. Loan officers also have access to multiple investors, sometimes more than mortgage brokers.
Brokers don’t get paid unless the loan closes, so they might be able to offer more personal attention to your loan and help get it closed more quickly. A loan officer, on the other hand, is paid by your lender, and might not be able to provide the same level of customer support.
If you do choose to work with a broker and your mortgage application is denied, they can always reapply with a new lender. If your mortgage is denied via a loan officer, you might not be able to take further action with that institution and will have to start over somewhere else, unless you lender has second review processes in place.
If buying a house is a completely novel experience, you might look into working with a mortgage broker.
While these professionals make their living at matching borrowers with ideal mortgage plans, it’s important to conduct your own market research to find yourself the best rate.