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What Is a Mortgage Broker?

Financing that next investment? A mortgage broker might be able to help.

Apr 06, 2021 by Aly J. Yale
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If you're looking to save cash on your next property purchase, studies show that shopping around for your mortgage is one of the best ways to do it.

It's true: According to Freddie Mac (OTCMKTS: FMCC), getting just five quotes for your loan can save you about $3,000 in the long haul. If that comparison-shopping leads to a much lower rate? It could mean even more saved.

Unfortunately, shopping around for a home loan is tedious, and for a busy investor already short on time, it's pretty unappealing.

Enter the mortgage broker: a veritable personal shopper for mortgage loans. With a broker, you don't have to do all that time-consuming loan shopping yourself. And better yet? They might have access to lenders you haven't even heard of.

What is a mortgage broker?

A mortgage broker is essentially a go-between. They're a middleman between consumers and lenders, and they help you compare mortgage loan options when buying or refinancing a house.

Mortgage brokers also help with the loan application process. They'll work with you to complete your paperwork, pull your credit report, and gather up any required documentation. Finally, they'll submit it all to the lender on your behalf.

To be clear: A mortgage broker isn't the same as a mortgage loan officer or mortgage banker. Brokers are independent, and they aren't employed by the lender, bank, or financial institution they connect you with. Loan officers and bankers, on the other hand, are, and they'll only offer you their own employer's loan products. For this reason, brokers can usually give you access to a much wider array of loan products and mortgage rate options.

How mortgage brokers are paid

Make no mistake, though: Mortgage brokers aren't free. In most cases, brokers get a commission once your loan closes. This usually ranges from 1% to 2% of the loan amount and is paid by the lender.

Sometimes you might pay the broker as part of your closing costs. This might be noted as an origination fee, loan administration fee, or another line item. Other times, they might get paid by the lender. You'll want to be extra clear on how your mortgage broker charges before moving forward with them.

Pros of using a mortgage broker

The biggest benefit of using a mortgage broker is that it can save you time and hassle. Applying for loans with multiple lenders can be tedious and time-consuming, so having a pro you can offload those tasks to can be quite beneficial to a busy investor.

Another big perk is the wide range of lenders a broker can give you access to. Mortgage brokers generally have a large, deep network of mortgage companies, banks, credit unions, and more, all of whom offer different rates, terms, and products. Tapping these networks can help you get not just the best deal on your loan but also a loan that's best suited to your goals for the property.

A broker can also give you valuable guidance along the way (i.e., help you avoid costly mistakes) and serve as a liaison between you and your chosen mortgage lender. This can help keep your loan on track and ensure you close on time and as expected.

Cons of using a mortgage broker

The downside of a mortgage broker is that their commissions may come at a cost. In some cases, you might pay it out of pocket, thus increasing your closing costs. In others, their commission could result in higher interest rates or fees from the lender.

Another downside is that not all lenders work with brokers. Additionally, brokers may steer you toward certain lenders if they know their commission is higher. This might mean getting a loan that's not the best fit (or price) for your specific situation.

Finally, brokers have less control over your loan than an in-house banker or loan officer would. You won't be able to negotiate terms or rates with them, nor can they do things like waive fees or make special offers.

Pros Cons
Saves you time and hassle May come with a fee
Helps with the application process May result in a higher interest rate
Keeps your loan on track Could steer you toward higher-commission lenders
There to guide you and answer questions Not all lenders work with them
Access to a variety of lenders and loan options Less control over your loan

When to use a mortgage broker

Mortgage brokers are best reserved for three situations. The first is when you're short on time. If you're bogged down with work and personal to-dos, adding five or six mortgage applications to the mix probably isn't high on your priority list.

That's where a mortgage broker can be particularly helpful. Not only will they manage the initial shopping around, but they'll also help with your application and documentation, too -- saving you even more time and hassle in the long run.

Brokers are also good for mortgage borrowers with more complicated situations. Have a low credit score, a high debt-to-income ratio, or inconsistent income? A broker's probably seen it before and can connect you with the right lending institution and loan product to fit your goal and budget.

Finally, a broker can be smart if you need a little extra hand-holding. Whether you're new to the mortgage loan process or just want someone to bounce questions and ideas off of, a broker is there to help.

Choosing the right mortgage broker

If you do opt for a mortgage broker, choosing the right one is critical. To start, ask for recommendations from friends, family members, and fellow investors. Your preferred real estate agent might also have someone they can refer you to.

You should also check online reviews, as well as their rating with the Better Business Bureau, and then sit down or call them up for an interview. How much experience do they have? What lenders do they work with? How are they paid, and who pays them? You should also ask for a reference or two and call them up for extra reassurance.

Remember: A mortgage broker could mean saved time, money, and hassle, but choosing the wrong one? It could cost you in the long run. Make sure you're thorough in your search and choose your broker carefully.

If you're not sure if a mortgage broker is right for your next property purchase, you can always go directly to a retail lender and get your quotes firsthand. Another idea? Consider talking to a financial advisor. They can give you the best guidance regarding your unique financial situation, as well as your long-term investing goals.

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