Shopping for a mortgage can take time and patience, but you don’t have to go it alone. One way to reduce the legwork and possibly get a better deal is to hire a mortgage broker.
Think of a mortgage broker as a matchmaker to connect you to a lender who meets your needs. Here are several reasons why you should consider working with a mortgage broker instead of going straight to a lender for your next mortgage.
- You could save more money.
- You could find more loan options.
- A mortgage broker can save you time.
Brokers can shop dozens of lenders to get you the best pricing, says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and mortgage adviser with C2 Financial Corp. in San Jose, California. Fleming says the rate and terms he negotiates with some lenders are often better than what a consumer could get by going directly to the same lender.
“When the lender outsources the loan origination and sales function to a broker, they offer to pay us what they would otherwise pay to cover their internal operations for the same function,” Fleming says. “If we are willing to work for less than that—and that is usually the case—then the consumer’s price through a broker ends up being less than if they went directly to the lender.”
Further, “A broker is legally required to disclose his compensation in writing — a banker is not,” says Joe Parsons, senior loan adviser with Pinnacle Capital Mortgage in Dublin, California, and author of the and author of the Mortgage Insider blog.
Brokers under federal rules must be licensed and cannot tie their pay to the interest rate you receive from a lender. In other words, working with a broker doesn’t ordinarily make your loan more expensive.
2. You could find more loan options.
Variety is another benefit of brokers. Using a mortgage broker can help you find the right lender for your specific needs.
“Some [lenders] may specialize in particular property types that others avoid. Some may have more flexibility with credit scores or down payment amounts than others,” says David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York and the editor of REFinBlog.com.
3. A mortgage broker can save you time.
Using a mortgage broker is essentially one-stop shopping, saving you time and headaches.
“If you are turned down by a bank, you’re done — you have to walk away and begin again,” Fleming says. “If you are turned down by one lender through a broker, the broker can take your file to another lender.”
A broker’s expertise and relationships can also simplify the process of getting a loan.
Brokers have access to private lenders who can meet with you and assess whether you have the collateral, says Mike Arman, a retired longtime mortgage broker in Oak Hill, Florida.
Private lenders, which include nonbank mortgage companies and individuals, can make loans to borrowers in unconventional situations that banks can’t or won’t because of regulations or internal policy.
RATE SEARCH: Compare mortgage rates.
Disadvantages of working with a mortgage broker
Mortgage brokers can tap a large network of lenders to find you a good deal, but they don’t work with every lender out there.
Reiss says that even if you’re working with a mortgage broker, it can be worthwhile to check out lenders on your own since no broker can work with every lender — there are simply too many. He suggests starting with lenders you already have a relationship with, and reach out to big banks, small banks, online lenders and credit unions.
“A broker may claim that he offers more choices than a banker because he works with many lenders,” Parsons says. “In reality, most lenders offer pricing on their loans that is very similar.” Although, he notes, a broker may have some niche lenders available for unusual circumstances.
Another downside to working with a broker is it can sometimes take longer to close your loan, Fleming says. Banks do their own loan processing and underwriting in-house, and generally have fewer overlays (additional restrictions on lending guidelines). That means banks may be a little more likely to approve a loan that just barely meets guidelines, he says.
A mortgage broker doesn’t have any power over deciding the terms, borrowing requirements or pricing of your loan. Once the loan is turned over to the lender, the broker is out of the picture.
4 questions to ask a mortgage broker
Here are four questions to ask a prospective mortgage broker:
- Can I get your references?
- How long have you been in business?
- How are you paid?
- How do you handle rate locks?
Can I get your references?
Ideally, you found the broker through a reference from a friend, relative or co-worker. But if you found the broker another way, it’s smart to check on references.
Ask for the names and contact information for the most recent two or three customers who closed loans with the broker. Then call and ask what their experience was like. Did the broker treat them fairly? Did the loan estimate have accurate information? Were there any issues closing the loan? Did the closing disclosure have roughly the same costs as the loan estimate?
Above all, ask if they would do business with the broker again.
How long have you been in business?
How long is long enough? Choose a broker who has been in the industry for at least three years (but preferably more). Ask how much experience the broker has with specific loan types you might be interested in such as FHA or VA loans, for example. You can check to see if they hold the proper licensing to be a mortgage broker in your state through the Nationwide Mortgage Licensing System and Registry.
How are you paid?
Mortgage brokers get paid in either one of two main ways: upfront at closing by the borrower, or after the transaction closes by the lender. The broker’s fee is a small percentage of the loan amount, usually between 1-2 percent.
How do you handle rate locks?
Once you commit to working with a specific lender, you can request a rate lock. This ensures that you receive the same the interest rate you’re quoted for a set timeframe, regardless if rates go up or down. A typical rate lock period lasts up to 30 or 60 days, or you can pay more money to extend the rate lock. Also, you can add a float-down clause, if your lender permits it, within a rate lock that guarantees you a lower rate if rates fall during your lock period.
Some borrowers choose to “float” their rate until closing. This can be a risky move if rates move up, but it can save you substantially if they go down before you close on your loan.
Ask your broker for a loan commitment letter from the lender. It should have the lender’s name and specify the interest rate and points, the date the rate was locked, and when the lock expires.
The bottom line
As with any product or service, shopping around for a mortgage is always a good idea that can save you big bucks. It’s worth speaking to a few brokers before choosing one so you feel confident in who you’re working with.
Remember, before committing to a loan with a banker or a broker, compare loan estimates, ask questions about any fees you don’t understand, and don’t be afraid to negotiate.
With additional reporting by Deborah Kearns.