Here’s everything you need to know about what mortgage brokers do, how they get paid, and whether hiring one is the right choice for you.
What does a mortgage broker do?
A mortgage broker acts as the middleman (or woman) between you and your potential lenders: financial institutions such as banks and credit unions.
Your broker will handle all the tedious legwork involved in securing your mortgage, from shopping around for competitive rates to ensuring that the lender you settle on has everything needed to approve your home loan.
The broker will take care of all the documentation required to complete your application, and will work directly with the lender to make sure your loan is processed in a timely manner.
Using a mortgage broker is a great option for anyone who feels intimidated by the application process, or who simply doesn’t have the time and energy to handle it on their own.
A mortgage broker also can be beneficial if your financial situation is not conventional — if, for example, your income does not appear on a W-2, or your credit score isn’t so great.
It’s your mortgage broker’s job to find a lender that will accommodate your needs, even if you don’t meet the criteria of the lenders in your area.
How do mortgage brokers get paid?
Using a mortgage broker will save you time and effort as you apply for your loan, but that help does come at a cost.
Unlike loan officers, who are paid a salary, mortgage brokers are paid per transaction. They earn money on every loan they successfully push through, and the larger the amount of the loan, the more they’ll make.
Most brokers earn around 1% to 2% of the loan amount, though the percentages can be higher or lower, depending on how competitive the real estate market is in your area.
You provide your broker’s compensation, either directly or indirectly. You may have to pay the broker outright, or the broker will be paid by your lender — who will pass the cost along to you, often by rolling it into your interest rate.
As the client, you get to decide which payment structure you’d prefer to use. But by law, the broker is not allowed to accept payment from both you and the lender.
The Dodd-Frank Act of 2010 included several consumer protection measures for clients of mortgage brokers. To give a couple more examples: Brokers aren’t allowed to steer you toward businesses they’re affiliated with, like transfer companies, and they’re not allowed to charge hidden fees.
If possible, get your broker to provide an itemized list of all fees so you know exactly what you’re paying for. That way, you can ensure you won’t be overcharged or saddled with any surprise costs.
Is it worth it to use a mortgage broker?
Whether hiring a mortgage broker is right for you will depend on a few different factors.
As we’re already mentioned, if you rely on non-W-2 income or your credit isn’t great, a mortgage broker will likely save you a lot of time and stress.
When mortgage brokers can’t find a well-known lender to accommodate your financial situation, they might be able to tap into loans from lesser-known local or state lenders.
Plus, mortgage brokers are a good option for people who don’t want to deal with the hassle of researching the mortgage market, shopping around for the best rates, and doing all the necessary paperwork.
As a bonus perk, a broker may be able to lower the cost of your mortgage by using relationships with lenders to get some standard fees waived for you, or land you an exceptional rate you may not have found on your own.
Depending on the size of the loan you’re planning to take out, you might find a few drawbacks to using a mortgage broker.
Some brokers may not have access to lenders that provide large loans, called nonconforming or jumbo loans.
And even if your mortgage broker does work with lenders offering loans in large dollar amounts, the baked-in cost of your broker’s fee will likely cause your interest rate to shoot up.
So if you’re hoping to get a larger-than-average loan, hiring a mortgage broker might not be worth the expense.
Other things to consider
Before you decide to work with a mortgage broker, you’ll need to consider a couple of trade-offs.
When weighing all the loan choices that your broker suggests, you should measure each option against what you’d save or lose by not working with the broker.
Does the amount the broker will save you offset your long-term costs if the broker’s fees are baked into your loan in the form of a higher interest rate?
In general, most lenders pay brokers roughly the same amount — considered "market rate." If the lender is planning to bake your broker’s fee into your loan, check to see if you’ll save more in the end by just paying the mortgage broker yourself, directly.
How to find a mortgage broker
If you think working with a mortgage broker will make securing a mortgage easier for you — and that it will be worth the cost — you have a few ways to go about finding one.
A great place to start is by asking your real estate agent for a referral. If you don’t have a real estate agent, try searching online for the top-rated agents in your area to see if their websites include links to any mortgage brokers they work with.
You also can seek out referrals from your friends, family or co-workers, but make sure you hold these referrals up to the same high standard — and do the same due diligence — that you would if they were coming from a real estate agent.
As a general rule, you should plan to meet with at least three mortgage brokers before settling on one.
During your meetings, ask about their experience, the services they offer, the lenders they work with, and how much they typically earn on the loans they process.
Make sure they’re licensed in your state, and check for online reviews to make sure they’re in good standing. The Better Business Bureau is an excellent resource for this kind of information.
The bottom line
If you feel overwhelmed by the mortgage application process, if your financial situation is complicated, or if your latest credit report wasn’t great, working with a mortgage broker might be the best way to get a good rate on your mortgage.
Just make sure to do your research first, and do some math to confirm that the benefits will outweigh the costs.