Wednesday, April 13, 2016

5 Facts About Working With a Mortgage Broker

You’ve narrowed down the search to find your dream home, and now you’re on the hunt for the best mortgage to put those keys in your hand. One way to do it: Work with a mortgage broker who can shepherd you through the intricate lending process from start to finish.

You’ve probably heard the term “mortgage broker” from your real estate agent or friends who’ve bought a home. But what exactly is a mortgage broker and what does one do that’s different from, say, a loan officer at a bank?

Here are answers to five of the most common questions about mortgage brokers.

1. What is a mortgage broker?

Think of a mortgage broker as a middleman between you and potential lenders. The broker’s job is to work on your behalf with several banks to find the loan with the most competitive terms and lowest rate that best fits your needs. People often use “mortgage broker” and “loan officer” interchangeably but they aren’t the same. (We’ll explain later.)

In general, mortgage brokers are licensed and regulated financial professionals who have a well-developed stable of lenders they work with. They do all the legwork — from gathering documents from you to pulling your credit history and verifying your income and employment — and use the information to apply for loans on your behalf with several lenders in a short time frame.

Once you settle on a loan and a lender that works best for you, your mortgage broker will collaborate with the bank’s underwriting department, the closing agent (usually the title company), and your real estate agent to keep the transaction running smoothly through closing day.

2. How does a mortgage broker get paid?

Like most sales professionals, mortgage brokers charge a commission for their services. They typically charge a “loan origination fee,” which is about 1% of the loan amount and is paid by the borrower at closing. Sometimes, though, mortgage brokers negotiate no-cost loans so you don’t have to shell out extra money up front; the broker will instead be paid by the lender after the loan closes. However, choosing a no-cost loan to minimize your out-of-pocket expenses means you’ll pay a higher interest rate, which costs more over time.

So what makes loan officers different from mortgage brokers? Loan officers are employees of a lender and are paid a set salary (plus bonuses) for writing loans for that lender. Mortgage brokers, who work within a mortgage brokerage firm or independently, deal with many lenders and earn the bulk of their money via commissions. The larger the loan amount, the higher the broker’s commission will be.

3. What are the pros of using a mortgage broker?

For starters, a mortgage broker acts as your personal loan concierge and does all the work for you. The broker applies for loans with different lenders on your behalf, finds the lowest rates, negotiates terms and makes the approval magic happen.

Most mortgage brokers have relationships with several local, regional and even national lenders, and they can tap those connections to get some loan fees waived for you. A mortgage broker will give you accessibility and one-on-one attention you likely won’t find when working directly with a loan officer at a large bank.

Another perk: Some banks and lenders work exclusively with brokers, and that positions you to get qualified for certain loan products if your mortgage broker has a good relationship with those lenders.

You’ll also save time by using a mortgage broker; it can take hours to apply for different loans, and then there’s the back-and-forth communication involved in underwriting the loan and ensuring the transaction stays on track. A mortgage broker can save you the hassle of managing all those daunting details.

4. What are the cons?

You’ll spend big bucks to pay a mortgage broker for a job you could do yourself. But keep in mind that it takes a lot of time, effort and communication to shop different lenders if you’re flying solo.

Using a broker also takes the control of working directly with a lender out of your hands. Some mortgage brokers work only with specific lenders and have agreements to drive a certain percentage of business their way — even if the loan products are not an ideal fit.

Another drawback of using a mortgage broker is fewer options. The mortgage industry (brokers in particular) shouldered much of the blame for doling out subprime mortgages and contributing to the collapse of the housing market. As a result, some large banks have stepped away from wholesale mortgage lending and stopped working with mortgage brokerage companies.

You can get around this potential roadblock by working directly with a loan officer at a big bank, especially if you already do your personal banking there. Who knows? You might be able to negotiate better terms and a lower rate. But no matter how good the deal looks, shop around. Contact at least three lenders; don’t automatically take the first loan offer.

5. How do I choose the right mortgage broker?

The best way is to ask friends and relatives for referrals, but make sure the referring friend has actually used the broker and isn’t just dropping the name of a former college roommate or distant acquaintance. Learn all you can about the broker’s service, communication style, level of knowledge and approach to clients.

Another great referral source: your real estate agent. Ask your agent to give you the names of a few brokers that he or she has worked with and trusts. Some real estate companies offer an in-house mortgage broker as part of their suite of services, but you’re not obligated to go with that company or individual.

To choose the right mortgage broker, it’s wise to interview at least three people to find out what services they offer, how much experience they have, and how they can simplify the process. Don’t forget to check your state’s professional licensing authority to ensure they have current mortgage broker’s licenses in good standing. Also, scope out online reviews or check with the Better Business Bureau to make sure the broker you’re considering has a sound reputation.

Next steps

If you don’t have the time, patience or know-how to navigate the lending process on your own, talk to a mortgage broker who’s experienced and comes highly recommended. Don’t be afraid to ask questions and learn about each step in the loan process; you’ll walk into your closing with more confidence and satisfaction.

More from NerdWallet

How much house can I really afford?
Compare mortgage rates
Find a mortgage broker

Deborah Kearns is a staff writer at NerdWallet, a personal finance website. Email: dkearns@nerdwallet.com. Twitter: @debbie_kearns.

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