Are you looking for the right mortgage broker, but not sure how the fees work? You’re not alone. Mortgage broker compensation is confusing at best. But don’t worry: SuperMoney is here to demystify mortgage broker fees. We’ll break down the different ways brokers get paid, and how you can decide which payment structure is best for your budget.
Plus, check out the handy checklist at the bottom to learn which questions you should ask when choosing a mortgage broker.
Mortgage broker fee schedules: Lender-paid vs. borrower-paid
Until 2011, mortgage brokers could get compensated by both lenders and borrowers on the transactions they closed. But in 2011, regulations were put in place to outlaw this practice. Now, brokers have to choose whether they want to get paid by the borrower directly or by the lender.
But which option is better for you? That depends on your circumstances.
Let’s take a closer look at the two types of mortgage broker fees.
With a lender-paid fee schedule, a broker connects a homebuyer with a mortgage lender, and then that lender pays the broker. Brokers may use different compensation packages with different lenders.
For the homebuyer, this structure is advantageous because they don’t have to pay the broker for their services when the deal is closed. That said, they do still cover the broker’s commission indirectly by paying a higher interest rate (also known as a yield spread premium).
One notable drawback to this compensation structure is that brokers may be biased by the compensation offered by different lenders. To illustrate this issue, let’s look at an example. A hypothetical broker is hired to help a home buyer find the right lender for a $250,000 mortgage loan. The broker must choose between two prospective lenders, Lender A and Lender B. Lender A charges a higher interest rate than Lender B, making them a less desirable choice for the home buyer. But the broker stands to make a 2% commission ($5,000) from Lender A, and only 1% ($2,500) from Lender B. Which lender do you think they will recommend?
A responsible broker should present a borrower with the best, most affordable option, regardless of the commission. Unfortunately, not all brokers are so honest. If the broker prioritizes their own profit, the home buyer may end up paying a lot more than they need to.
Here is a list of the benefits and the drawbacks of lender-paid compensation.
- Don’t pay the broker fee out-of-pocket when the loan closes.
- Pay a higher-than-market interest rate.
- Brokers may be biased toward certain lenders.
- You may end up paying more for your loan in the long run.
If a mortgage broker uses a borrower-paid fee schedule, the homebuyer will pay for the broker’s services when the loan closes. This payment often comes in the form of an origination fee — typically 1.0% to 2.0% of the loan amount. So if you have a mortgage of $250,000 and your broker charges a 1.5% borrower-paid commission, you’d owe them $3,750 at closing.
Note that the fee amount varies based on your state of residence, your chosen broker, the size and complexity of the loan, the state of the housing market, fee caps, and more. Further, borrower-paid compensation isn’t always in the form of an origination fee. It can also be broken into other miscellaneous fees on the loan estimate.
Why is this pay structure advantageous to borrowers? Because it removes the broker’s temptation to choose a more expensive lender who will pay them a higher commission. With a borrower-paid compensation structure, the broker is more motivated to choose a more affordable lender, since they’ll make the same commission either way. Plus, the costs are more transparent than those of lender-paid compensation structures.
Here is a list of the benefits and the drawbacks of borrower-paid compensation.
- Get the lowest interest rate available.
- Transparent pricing.
- Reduce the risk of lender biases.
- Pay more out-of-pocket at closing.
Which mortgage broker fee type is best for you?
Regardless of your chosen compensation structure, you’ll end up paying the broker’s fee in one way or another. So the right fee schedule for you depends on whether you’d rather make that payment upfront or over the course of the loan.
That said, if you have the money at the time of closing, borrower-paid compensation is probably your best bet. This way, you’ll avoid needlessly inflating your loan payments. Plus, you won’t have to worry about whether your broker’s recommendation was influenced by their desire for a higher commission.
Keep in mind that fee schedules vary greatly across different lenders and brokers. As such, if you want to get a good deal, you’ll have to comparison shop. Look at the whole picture, including origination fees, other lender fees, and the annual percentage rate (APR) to find the best overall value.
Lastly, brokers typically don’t have a base pay or salary — they get paid solely by commission. So if you see a broker advertising “no cost” loans, you should be suspicious. Always ask how a broker is compensated if they are not disclosing that information.
List of mortgage broker fees
Mortgage broker fees can get creative when it comes to naming fees. Here are some you may encounter:
- Loan origination fees – Some mortgage brokers may simply add their fees to the lender’s origination fees. If so, ask for a breakdown. Loan origination fees are often charged as a percentage of the loan.
- Yield-spread premium – A yield-spread premium is a fee lenders pay brokers for getting their client to agree to an interest rate that is higher than the going market rate. If you choose to deal with a broker, check your rate is competitive. If your broker is not charging you a fee, someone is paying them. It may be literally in the broker’s best interest to overcharge you on interest rates.
- Upfront fees – This fee is often charged when borrowers are looking for a jumbo loan. Upfront fees are typically charged as a flat cost for setting up the loan. If your broker does not charge upfront fees, check they aren’t getting a yield-spread premium from the lender. In such case, you are probably being charged a higher-than-market interest rate.
- Administration fees – In some cases, mortgage brokers add an administration fee to their standard fees. If you see these fees on your mortgage agreement, ask them to be waived. Unless your credit profile is high-risk you can probably negotiate your way out of these fees.
What questions should you ask when choosing a mortgage broker?
Mortgage broker fees are important, but it is not the only factor to consider when shopping for a broker. Here’s a quick checklist of questions to consider when vetting a broker:
1. How does their application process work?
One of the main purposes of a mortgage broker is to make purchasing a home easier for borrowers. The best brokers can provide the following data on their mortgage application process:
- Average time to close a loan
- Third-party fees typically included
- List of third-party companies they use (e.g. appraisal, title insurance, escrow, and inspections)
- Cost to lock a mortgage rate
- Online platform to track application
- Clear eligibility criteria to qualify for lenders in their network
- List of documents you need to complete an application
2. Is the broker taking into account your personal circumstances?
They should be asking a lot of questions about your situation and needs to find the best solution.
3. Are they offering a competitive interest rate and APR?
Check market rates and offers from multiple lenders to ensure you that you get the best rate available.
4. Are the fee costs competitive?
Total up all of the fees on the loan and compare them to other offers. Negotiate fees down where possible.
5. Does the broker offer a low-cost lock-in option?
Locking in a great rate and the accompanying terms can be hugely beneficial, as they fluctuate regularly.
6. Do the loans have prepayment penalties?
Prepayment penalties can cost you around six months of interest if you pay off your loan early, so it’s best to avoid them.
7. How long will the entire process take?
Find out how long a broker typically takes to finalize transactions. You’ll want to know what to expect and whether they guarantee on-time closings.
8. How large is their lender network?
What type and quantity of lenders can a broker connect you with? Some may offer more attractive networks than others.
9. What is their track record?
Does the broker have a good reputation? How long have they been in the business? Do they act in the best interests of the home buyer? Read reviews and ask for references to learn about a broker’s customer service.
Use this checklist as a guide as you shop around for mortgage brokers. Look for the one that offers the best overall value.
Find the right mortgage broker for your next home purchase
Ready to start shopping for mortgage brokers but not sure where to look? We’ve got your back. Head over the SuperMoney mortgage broker review and comparison page. You’ll find a collection of industry-leading brokers side-by-side. Read reviews, compare offerings, and cut down on your research time!