Finding the perfect home to buy is no small feat: so many online searches, drive-bys, and open houses. Then comes the time-sucking process of finding the right mortgage. A matchmaker called a mortgage broker can help.
The broker goes fishing for multiple loan offers from different types of lenders in pursuit of the best deal.
How exactly does a mortgage broker work? Keep reading to discover more about mortgage brokers, how to find one, and the pros and cons of working with one.
First, Mortgage Basics
Whether a consumer chooses to work with a mortgage broker or not, it’s best to know what it means to take out a mortgage.
These are some of the basics.
Loan term: This refers to how long borrowers have in order to repay their loan. A typical term is 15 or 30 years.
There are advantages and disadvantages to choosing a shorter or longer loan term. For shorter terms, the monthly payments are higher but the interest rates are usually lower, and the total cost of the loan is lower.
For longer-term loans, the total cost is higher and generally the interest rates are higher, too, but monthly payments are lower.
Fixed rate vs. adjustable rate: The chosen interest rate dictates whether the interest rate will change over time or stay consistent, if the monthly principal and interest payment will change, and how much interest will be paid over the life of the loan.
Typically, fixed-rate mortgages have no surprises but carry a higher rate than the initial rate of an adjustable-rate mortgage, or ARM. Fixed interest rates don’t change over time, and the monthly principal and interest payment remain the same.
With an ARM, after an initial period, the interest rate can fluctuate based on the market, which can lead to the monthly principal and interest payments increasing or decreasing over the life of the loan.
Recommended: First-Time Homebuyer Guide
What Is a Mortgage Broker?
In short, a mortgage broker is a middleman between the homebuyer and mortgage lenders. While requirements vary by state, typically brokers are trained professionals who must obtain certain licenses.
When you plan to buy a home, it can be smart to research multiple lenders. Doing so allows you to see which lender is offering the best rate and fees for your particular financial situation and down payment.
This can be a time-consuming process that requires submitting multiple documents and applications. A mortgage broker can do all of the work associated with applying for the consumer.
Because mortgage brokers generally have partnerships with multiple lenders, they can help find the best financial fit for their clients while saving them the time it would take to do the work themselves.
Pros of Using a Mortgage Broker
Why use a mortgage broker? It’s not for everyone, but there are some benefits worth considering.
Provides more access. Because of their professional relationships, mortgage brokers usually have more access to different lenders than the average person does—some that many consumers don’t even know exist because they offer home loans only through mortgage brokers.
May find better rates and terms. Mortgage brokers may be able to find lower rates and fees than the average homebuyer could find on their own.
Keeps it simple. As mortgage brokers are experts in their field, they can make the entire process simpler to understand. They’ll break down the differences between lenders and help their clients understand mortgage jargon. It’s worth noting that consumers should still educate themselves so that they have a good understanding of the process.
Saves time. Buying a home is time-consuming and can be stressful. A broker will research rates, fees, and minimum credit score requirements so that clients don’t have to.
Cons of Using a Mortgage Broker
There are also some downsides worth considering before pursuing this path.
Cost can vary. Before agreeing to work with a broker, ask how they make their money. In some cases, the lender pays the mortgage broker, and in others, the client pays the broker. If payment is the client’s responsibility, ask if they charge a flat fee or earn a commission.
Lenders usually pay a higher commission than borrowers do. Lenders typically pay between 0.5% and 2.75% of the loan amount. When a client pays a commission, a broker usually charges an origination fee of less than 3% of the loan amount.
The housing market in a particular area can influence what a broker charges.
Conflicts of interest may arise. While at first glance it may seem more beneficial to work with a mortgage broker who is paid by the lender, give this some thought. Is the broker biased toward lenders that pay the commission? Researching brokers before working with them and asking for referrals can help. Do some digging to see if past clients found them to be trustworthy.
Some lenders don’t work with mortgage brokers. Some lenders only work with brokers, and some never work with them. People who hire a mortgage broker may miss out on certain opportunities.
How to Shop for a Mortgage Broker
The search for the right mortgage broker should not be taken lightly. Doing research and considering options are important steps toward making the experience a positive one.
One of the first steps to take toward finding a good mortgage broker is to ask for references from trusted friends, family members, or colleagues who have recently bought homes with the help of a mortgage broker.
To widen the search, there are also websites that host customer reviews of local mortgage brokers. While any broker may have a few negative reviews, look for patterns in the reviews to make sure that negative experiences are the exception, not the norm.
Treat shopping for a mortgage broker like an interview. Ask about their certification and experience, commissions, and what the homebuying process would look like in tandem with them.
You may be able to find out if a broker is licensed through the National Mortgage Licensing System & Registry.
Finding a Mortgage Without a Mortgage Broker
People who aren’t interested in working with a mortgage broker can shop for a mortgage on their own from a commercial bank, credit union, or private lender.
Prequalifying, based on self-reported data, will give you an idea of how big a loan you may qualify for—a ballpark figure. (Prequalifying involves a soft credit inquiry, which does not affect a credit score.)
If you’re serious, preapproval is the next step, when lenders verify your employment status, income, credit history, and debt to determine how much you can reasonably afford to borrow. If approved, you’ll receive a conditional commitment in writing for an exact loan amount. (Applying with too many lenders may result in score-lowering hard inquiries, but having many offers in hand provides negotiating leverage with individual lenders.)
Working with an online lender may be a good option for soon-to-be homeowners. SoFi aims to make applying for home mortgage as painless as possible, while offering competitive rates and exclusive member discounts.
Applicants don’t have to worry about pesky hidden fees or prepayment penalties.
What is a mortgage broker? A go-between between the loan seeker and lenders. There are many pros and cons to consider. A mortgage broker can be just the ticket for some home buyers but not all.
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