A mortgage broker acts a middleman between a borrower and a lender. Brokers assist in preparing documentation that includes completing loan applications, verifying income and employment and pulling a credit history. A broker then uses this information to apply for and obtain loans that meet the borrower's needs from the lenders with whom they have established relationships.
The Cost of Using a Mortgage Broker
A mortgage broker is paid on commission, which generally amounts to one-percent of the original loan amount. This is called a loan origination fee and is paid by the borrowers at closing. In some cases, a broker may negotiate a no-cost loan so there are no up-front costs for the borrower, and the broker is paid following loan closing by the lender. However, a no-cost loan that minimizes up-front costs for the borrower generally has a high interest rate which means the borrower pays more for the loan over time.
The Difference Between a Broker and a Loan Officer
A loan officer works directly for a lender as a salaried employee, although some may also act as brokers, receiving commissions in addition to a salary. Loan officers are known as mortgage or home-loan consultants, loan originators or mortgage planners.
Choosing a Mortgage Broker
Borrowers can ask a real estate agent for mortgage broker referrals. Many agencies offer brokers as part of their services but borrowers are under no obligation to use them. Friends, relatives and neighbors are good sources for referrals but borrowers need to ensure the referring entity has actually used the broker and are satisfied with the experience. It's important for borrowers to Interview at least three potential brokers, then research the current mortgage rates on their own. A check with the state's professional licensing agency determines if the broker is in good standing and the use online reviews is helpful for additional information. It's appropriate to ask the broker what lenders purchase loan applications from them, what types of loans they offer, such as VA or FHA, the commission rate and how much is expected as payment. When a broker presents loan options to a borrower, there are several questions to address such as:
- How the broker arrived at the interest rate offered, and is it the best rate
- If the loan is an adjustable-rate mortgage, what to expect when the rate resets
- Is the rate locked in
- Estimated closing costs
- The annual percentage rate, monthly payments and prepayment penalties
Pros and Cons of Using a Mortgage Broker
Drawbacks: The biggest drawback to hiring a mortgage broker is cost. If the broker's commission is one percent of the loan, then the borrower pays $3,000 in loan origination fees on a $300,000 loan. Borrowers may choose to secure a loan from their personal bank at better terms and a lower rate, but the products to choose from may be limited. When a borrower wants a hassle-free and speedy home-loan determination, paying a broker's commission may be worth the peace of mind and ease it provides.
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Benefits: Hiring a mortgage broker during the home-buying process simplifies the application process and speeds up approval. Brokers use their connections with local, regional or national lenders to negotiate terms, find the lowest mortgage rates which makes approvals easier. A mortgage broker is readily accessible to the borrower and provides one-on-one attention.