Shopping around for a mortgage can save a borrower thousands of dollars. So you’d think everyone would take the opportunity to compare their options.
However, the National Survey of Mortgage Borrowers found that nearly half of those who take out a mortgage considered only one lender before choosing where to apply for their loan.
What’s more, more than three-quarters (77%) applied to only one lender in the end.
Now that you’re an older, wiser homeowner, you know that every dollar saved counts. As you think about who to go to for your refinance or next mortgage, you’ve got a second chance to do your due diligence.
That’s where a mortgage broker can help find a loan that best matches your needs, but you also might be better off comparison shopping on your own. Understand the pros and cons of working with a middleman who connects borrowers with lenders before you sign up for any extra fees.
What is a mortgage broker?
Some people use the terms “mortgage lender” and “mortgage broker” interchangeably, but they’re quite different. A mortgage lender is a financial institution such as a bank or a credit union that makes loans directly.
A mortgage broker doesn’t lend money; rather, he or she works with many lenders to find the right deal for someone in need of a mortgage, according to the Consumer Financial Protection Bureau (CFPB), a U.S. government agency that regulates the offering and provision of consumer financial products and services.
That said, some financial institutions operate as both lenders and brokers, so you should ask the financial institution that you’re working with whether a broker will be involved and collecting any fees on your transaction.
The pros and cons of using a mortgage broker
Pro 1: Find better rates than you would shopping on your own
A mortgage broker acts as a matchmaker between consumers and lenders, offering loans from a variety of lending companies and more choices in terms of both rate and loan types.
Freddie Mac, the congressional entity chartered in 1970 to provide liquidity, stability, and affordability to the US housing market, reported in April 2018 that consumers who obtain five rate offers save an average of about 16.6 basis points, or 0.166%, on their mortgage rate.
For a typical $250,000 loan, obtaining one additional quote could save an average of $1,435. Receiving five rate quotes could save an average expected benefit of $2,914. Mortgage brokers also might be able to get lenders to waive certain fees.
Pro 2: Brokers can help secure a loan for those with non-traditional jobs or income sources
With tightened lending standards in the wake of the subprime mortgage crisis, it can be difficult to get bank approval for a loan, or get a loan with favorable terms, if you have:
- A history of bad credit, even if you’ve worked hard to improve it
- A non-traditional job situation such as self-employment or freelance work
- Income from a second job that lenders won’t account for
While you might only be considering the most common loan options like a 30-year fixed, 15-year fixed, or adjustable rate mortgage, a mortgage broker has access to hundreds of different loan products across various lenders in their network and may be able to find you an option that suits your needs.
“Innovative mortgage strategies and sophisticated solutions are the advantage of working with an experienced mortgage broker,” explains 5-star lender Mortgage Advantage.
Pro 3: You only need to send in one application to review your mortgage options
You can get a feel for different lender fees online, but truly shopping around for more than one mortgage on your own requires that you apply individually to every lender from whom you collect an exact quote.
Not only is that labor intensive, but each lender will run a credit check, and the act of pulling a credit report in and of itself can damage your credit.
You also won’t know which lender will save you money one way or another until the lender’s crunched the numbers on the rates, terms, origination costs, and lender credits.
With multiple quotes in hand, you can go to one lender and say, “Hey, I like working with you, but John Doe across town will save me $2,500 in closing costs with his special lender credit.”
But a mortgage broker collects that information and negotiates on your behalf, while you only have to fill out a single application before deciding on a lender.
Con 1: Mortgage brokers get paid by commission, so they’re incentivized to get you a higher loan
Brokers work off commission—typically 1 to 2% of the total loan amount—and because of this, some might be incentivized in getting you into a mortgage or refinancing deal that maximizes what you qualify for but isn’t entirely right for you.
Because of the 2008 housing market crash, federal regulations such as the SAFE Mortgage Licensing Act now forbid brokers from taking premiums from lenders in return for steering customers into high-risk, higher-priced loans that they can’t afford.
Even so, you want to be sure that you’re getting the best offer for your circumstances.
Con 2: There’s no such thing a free lunch—or a free mortgage broker
As mentioned above, mortgage brokers will typically get a certain percentage of your mortgage as payment.
So you have to determine whether the savings they can offer you by finding the best deal and negotiating fees will exceed that which you pay them to do the work.
“With today’s technology, you can simply use a search engine to find hundreds of lenders to work with,” explains an article by Mortgage 101.com, a site founded in 1996 that’s dedicated to educating online consumers about the mortgage process founded.
“You will then be able to compare all of the different offers that are available from these lenders and try to find the best one for your unique situation. You may not necessarily need to pay a mortgage broker for something that you can do on your own.”
Con 3: Going lender-direct has its advantages
What’s more, some types of mortgage products, such as jumbo loans, or higher-priced mortgage loans, may only be available if you’ve developed a long-term relationship with a lender.
As explained by the New York Times: “If brokers offer clients variety, mortgage lenders have the advantage of control. Because the bank is the one lending the money, the bank makes the decisions.“
A bank could more nimbly make a one-off decision, like a “small exception” to fund an unconventional loan, for example (so long as they were within the bounds of government regulations).
A mortgage broker, on the other hand, doesn’t have that direct lending power.
Don’t just comparison shop for mortgages—weigh your mortgage broker options just as carefully
Just like you should shop around for a mortgage lender, experts recommend vetting mortgage brokers, too.
The National Association of Mortgage Brokers has a searchable database of brokers, or “Lending Integrity Professionals,” who meet stringent criteria, including undergoing national criminal background checks and attending professional education regularly, including ethics training.
In addition, the Nationwide Mortgage Licensing System & Registry maintains a database of licensed mortgage brokers. The CFPB suggests checking if any disciplinary actions have been filed against a broker by checking with the appropriate regulator in your state. (The Nationwide Mortgage Licensing System provides an online form of state contacts.)
“Consumers believe they don’t need to shop rates when working with a mortgage broker because they’re shopping for you,” said Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate in an interview with U.S. News and World Report. “But shopping is better for you because you don’t know how much the mortgage broker you’re working with is charging, and you may talk to two brokers going to the same investor where one charges a higher percentage just to get paid more for your loan.”