If you're thinking of buying a home in the near future, chances are good that you'll need to obtain a mortgage. When doing so, you have two basic options -- deal with banks and other lenders directly, or hire a mortgage broker to do the hard work. Mortgage brokers aren't as abundant as they once were, but are still a sizable part of the mortgage marketplace. Here's what you need to know about mortgage brokers, and whether you should use one.
What is a mortgage broker?
Simply put, a mortgage broker is a middleman between a homebuyer and mortgage lenders. The mortgage broker will assess the borrower's finances, find appropriate mortgage products, apply for pre-approvals, gather necessary documentation, complete applications, and advise clients on the right mortgage products for them.
Mortgage brokers make their money by charging origination and or broker fees, which are paid when the loan is originated (at closing), and typically fall in the 1% to 2% range per loan. Before the subprime mortgage crisis, mortgage brokers had a large share of the market -- up to 68% by some estimates. However, the crash saw many of the larger lenders exit the wholesale mortgage market, essentially cutting the supply of loans to brokers. Nowadays, only about 10% of mortgages are originated with the assistance of mortgage brokers.
Many people automatically have reservations when it comes to hiring an additional professional to help with their home search -- after all, before the process is done, you'll probably pay a real estate agent, home inspector, and lawyer, just to name a few. Plus, a mortgage broker really doesn't do anything you're incapable of doing yourself.
Having said all of that, why would you hire a mortgage broker? Here are some of the potential advantages of bringing a middleman into your mortgage search.
- They'll do the rate shopping for you: This is unquestionably the biggest advantage of hiring a mortgage broker. Too many homebuyers simply obtain one mortgage quote from a bank and accept it, even though you can apply for as many mortgage quotes as you'd like without adversely affecting your credit. Even a small difference in mortgage rates can save you thousands in interest over the life of a mortgage, so it's certainly worth it to shop around.
The problem with this, as anyone who has been through the process can tell you, is that mortgage applications can be long. Applying for five different mortgage pre-approvals can easily take the better part of an afternoon to do. With a mortgage broker, all of this legwork is done for you.
More accessible than bank loan officers: Just like your real estate agent, the mortgage broker works for you and doesn't get paid unless you close your loan. For this reason, mortgage brokers tend to be more accessible to buyers than bank employees. So, when you have questions along the way, it's generally easier to get the answers you're looking for from a broker.
- Some lenders work exclusively with brokers: I mentioned already that some of the big banks don't work with brokers anymore. Conversely, there are some mortgage lenders that only work with brokers. So, your mortgage broker could have access to loan products that you don't.
- Could get lenders to waive some fees: Mortgage brokers can often get lenders to waive some of their fees, such as application, appraisal, and origination fees.
While there are definitely some positive reasons to use a mortgage broker, there are some drawbacks worth considering.
- Brokers have fewer loan choices than they used to: As I said, after the subprime meltdown, many lenders exited the wholesale mortgage market. This includes industry heavyweights such as Wells Fargo, Bank of America, and JPMorgan Chase, just to name a few. In other words, the selection of loans available to mortgage brokers is far more limited than it used to be.
- You could do it yourself: Other than exclusive partnerships with some broker-only lenders, there is not much a mortgage broker does that you can't do on your own. Obtaining quotes and filling out mortgage applications can be quite time-consuming, but if you have the time, it isn't anything you can't handle.
- Potential conflict of interest: Mortgage brokers are typically paid a fee by the lender for bringing them your business, and these fees can vary significantly among lenders. In fact, a major reason there are fewer mortgage brokers now is that it was revealed that many brokers were obtaining unaffordable mortgages for clients and collecting high fees. Thanks to the Dodd-Frank act, the process has become much more "honest" since then, but this is still a conflict you should be aware of.
- You may be able to find a better deal on your own – Since there are some lenders your mortgage broker won't have access to, it's entirely possible that you could obtain an equal or better deal entirely by yourself.
The Foolish bottom line
There certainly are some valid reasons to consider a mortgage broker, but that doesn't mean you should simply hire one and be done with it. As I mentioned, the FICO scoring rules allow you (or your broker) to apply for as many mortgages as you want during a short window of time. Because of this, it's a good idea to at least obtain a few quotes from lenders on your own before deciding to hire a broker. And, like any professional, be sure to shop around for a broker – check references, ask friends and relatives, and read reviews.
The point is that you should explore all of your mortgage options before making a decision. After all, a seemingly small difference in mortgage rates can mean thousands in savings over the life of a 30-year mortgage loan.