When purchasing a home, one of the first steps is finding out just how much mortgage you can afford. The mortgage amount is determined on several factors, such as how much debt you carry, what your income level and if you pass the mortgage stress test. Prospective buyers often consult with a number of lenders to find the best mortgage rate available. This is where mortgage brokers come in. There are many benefits of using the services of a mortgage broker, including that the buyer doesn’t receive a bill for this service. So, how do mortgage brokers get paid?
What is a Mortgage Broker?
A mortgage broker is an intermediary who links borrowers to potential lenders to assist the borrowers in obtaining the best possible mortgage terms. One of the main reasons borrowers use mortgage brokers is because the broker will do most of the work during the application process, saving the borrower both time and money.
The Role of a Mortgage Broker
While working to help a client obtain a mortgage, a mortgage broker will gather loan options from various lenders and then present these to the potential borrower. At the same time, the mortgage broker will submit the borrower’s profile to each lender. The broker will need proof of income, assets, employment documentation, a credit report and other documents to secure the best mortgage rate. This gives the lender the information to properly assess how much risk the potential borrower carries, allowing each lender to give their best quote to the broker.
Upon analyzing the borrower’s profile, the broker will determine an appropriate loan amount and submit all the information to each lender for approval. Throughout this process, the mortgage broker is the middleman who communicates with both the lender and the borrower until closing.
Mortgage brokers can be found through the referral of a real estate agent, an online search, or by asking friends and family for a recommendation. When considering a mortgage broker, the borrower needs to play the field and look at all options before settling on a broker, as this relationship is an essential piece in the home-buying process.
How Do Mortgage Brokers Get Paid?
So now that you know what a mortgage broker is and why they are helpful, you probably wonder how they get paid. The first thing to understand is that a mortgage broker is not an employee of a bank or another lender, and therefore, they are not salaried – they work entirely on commission or a finder’s fee. This finder’s fee comes out of the lender’s pocket that the borrower chooses to do business with, costing the borrower nothing.
Mortgage brokers will secure a deal with a lender on the buyer’s behalf, and then the lender will pay the broker a commission for securing the deal. This fee is a one-time payment, although there are times that a broker will receive an additional amount should the borrower renew their mortgage at the end of the term. From the lender’s perspective, this extra payment is for security purposes. Upon renewal time, the broker can persuade the borrower to switch lenders to find a better rate (and obtain another commission). However, by offering a commission at renewal, lenders can reduce the risk of losing the borrower – this also benefits the borrower as they won’t incur any switching costs associated with transferring to a new lender.
In other instances, the mortgage broker may receive a recurring payment after the borrower takes on the mortgage – this is known as a trailer. Essentially, the commission paid upfront to the broker will be less, but the broker will receive a regular, steadier income.
Usually, because mortgage brokers charge the lender, there is no cost to the borrower for their services. However, there are some unique circumstances where there is an upfront fee called a lender fee or application fee, which will either cover part of the broker’s commission or go to the lender for administrative costs.
When working with a mortgage broker, it is essential to shop around for one who fits your profile the best. Often, recommendations from real estate professionals are ideal as they are attuned to the market and the industry and can steer you in the direction of a broker who best suits you and your specific needs.