So, you’re looking to buy a home. This is an exciting time filled with home tours, wish lists, and looking forward to making new memories in a new house. But finding a lender and getting a mortgage can be a difficult and confusing task.
Many people don’t have the time to contact numerous lenders and comb through details when looking for a mortgage, and choose instead to go to a mortgage broker for help. Before you do, you should know what mortgage brokers can really do for you and how these loan brokers get paid.
What mortgage brokers do
If you go to a bank for a mortgage or home loan, it will offer only loans carried by that bank. Since it’s just one institution, its home loan options may be limited and may not suit your needs.
If you go to a mortgage broker, he or she should have a variety of loan options from various lenders. It’s the mortgage broker’s job to find the best mortgage rate, tailored for you.
So, if you need to get a house but can’t afford more than a 5% down payment on a 30-year mortgage, your loan broker should approach lenders with those terms.
Hopefully, with the help of that mortgage broker, you’ll find a lender that will offer you the mortgage you need more quickly than you would shopping for mortgage rates on your own.
How loan brokers get paid
Unlike loan officers, mortgage brokers don’t work for banks. They operate independently and must be licensed. They charge a fee for their service, which is paid by either you, the borrower, or the lender.
The fee is a small percentage of the loan amount, generally between 1% and 2%. If you pay this fee, the dollar amount can be either added to the loan or paid upfront.
This 1% to 2% of a loan may sound like a lot of money for you, or for the lender, to pay on top of the mortgage you’re already committing to. Fees may vary, depending on the size or number of loans, but luckily, you shouldn’t be stuck with any hidden fees.
Loan brokers are required to disclose all fees upfront and can charge only that disclosed fee amount. Further, each fee should be itemized, and the broker should be ready to tell you, the borrower, exactly what each fee was for.
When applying for a mortgage, it’s important to know exactly how much you’ll be paying in fees. Knowing what your mortgage broker fees will be upfront will be helpful.
Pre-Dodd-Frank Act
New regulations put in place by the Dodd-Frank Act have restructured how mortgage brokers get paid.
Before this legislation came into effect, lenders could compensate mortgage brokers for getting their clients to agree to high-interest rate loans and signing off on costly fees.
If an unassuming client worked with an unscrupulous loan broker, there were few laws in place to protect the client. As a result of the Dodd-Frank Act, that has changed.
Here are some ways mortgage brokers cannot get paid:
- They cannot charge you, the borrower, hidden fees.
- Their pay cannot be tied to your loan’s interest rate.
- They cannot get paid for steering you in the direction of an affiliated business, such as a title company.
- In general, they cannot be paid by both you and the lender.
Unless you paid upfront costs, mortgage brokers generally do not receive payment unless the deal is closed.
When you’re thinking of buying a home, and starting the arduous process of shopping for a mortgage and talking to lenders, teaming up with a broker may seem like a good idea.
Although it might be a bit scary to trust someone with the future of your mortgage, it can be a good idea to get some help.
With lots of knowledge of mortgages, plus experience working with loan officers and mortgage lenders, a broker may be invaluable in your first stages of buying a home.
Brokers will take a fee off the top, but that fee could be well worth it!
