If you’re looking to buy real estate, you probably don’t have the time to evaluate all of the loan options available to you. Indeed, for new homebuyers, finding the best loan for their financial situation can be a challenging task. A mortgage broker can help you make the right decision and navigate through the complexities of the closing costs associated with home loans.
However, you also need to know how to pick the right mortgage broker and how to understand their fees. Mortgage broker compensation is confusing, and finding the right mortgage broker can be one of the more difficult steps when buying a home.
But don’t worry: SuperMoney is here to demystify the process and help you better understand mortgage broker fees so that you can make the right choice for your situation. We’ll look at the different ways brokers get paid, explain how you can decide which payment structure best suits your budget, and give you tips for making sense of the information available to you to choose the right broker.
At the end of this article, you’ll find a checklist of important questions you should ask when choosing a mortgage broker for your next home purchase. These will help you gather all of the necessary information to choose confidently.
What does a mortgage broker do?
If you go directly to a lender (such as a bank) regarding a mortgage, they’ll only be able to provide you with options they offer directly, and these can be quite limited. Mortgage brokers, on the other hand, have access to an array of loan options from a variety of lenders and can help you navigate mortgage rates. They work with everyone involved in the home purchase process: real estate agents, lenders, title company representatives, underwriters, and, obviously, homebuyers. As such, mortgage brokers have a wide partner network and the ability to find mortgages with good rates.
Mortgage brokers do not provide loans or define their conditions; lenders do that. But a mortgage broker will help you examine the different loan choices available to you. This way, you’re able to shop for a loan based on rates and conditions and pick the right mortgage for your circumstances.
In short, a mortgage broker can save you both time and money—and help you pick the right loan.
Let’s now look at the different fee schedules of mortgage brokers and how they’re calculated.
Mortgage brokers vs. loan officers
Loan officers, unlike mortgage brokers, are employed by lending institutions such as banks or credit unions. Put simply, they approve or reject loan requests. They’re able to give you access only to the mortgages offered by their employer and might not be as knowledgeable as mortgage brokers about the mortgage and real estate markets.
Your mortgage broker might be able to negotiate a mortgage from a bank’s wholesale loan program, while a loan officer usually cannot offer you preferential wholesale conditions.
Mortgage broker fee schedules: Lender-paid vs. borrower-paid
Until 2011, mortgage brokers could be compensated by both lenders and borrowers on the transactions they closed. But in 2011, new regulations outlawed this practice. Now, brokers have to choose whether they want to get paid by the borrower or by the lender.
So, which option is better for you? That depends entirely on your circumstances.
Let’s take a closer look at the two types of compensation.
A mortgage broker does not work directly for a lending institution such as a bank or a credit union, but lender-paid compensation is still common. With a lender-paid fee schedule, a broker connects a homebuyer with a mortgage lender, and then it’s the lender who pays the broker’s fee. Brokers may benefit from different compensation packages with different lenders and will likely have access to a vast variety of loans.
For the homebuyer, this structure is beneficial because they don’t have to pay the broker for their services. That being said, they do still cover the mortgage broker’s commission indirectly by paying a higher interest rate, which is also known as a yield spread premium.
One notable drawback to this compensation structure is that mortgage brokers may be biased by the compensation offered by lenders. To illustrate this issue, let’s look at an example. A buyer hires a mortgage broker to help them find the right lender for a $250,000 mortgage loan. The broker must choose between two prospective mortgage lenders: Lender A and Lender B. Lender A charges a higher interest rate than Lender B, making them a less desirable choice for the homebuyer. 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 mortgage broker should present a borrower with the best and most affordable option among the loans that they have available regardless of the commission they receive. Unfortunately, not all brokers will be fully transparent or will necessarily act in the best interests of the buyer. If the broker prioritizes their own profit, the homebuyer may end up paying a lot more than they need to for their home loan.
THE RISKS & BENEFITS OF LENDER-PAID COMPENSATION
Below, you can see a summary of the advantages and the drawbacks of lender-paid compensation.
- You’re not paying the fee out-of-pocket when the real estate loan closes.
- You’re paying a higher-than-market interest rate.
- Brokers can 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 several factors:
- 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 down into other miscellaneous fees on the loan estimate, potentially driving the closing costs up.
Is this pay structure advantageous to borrowers? Overall, yes. 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 an affordable lender since they’ll make the same commission either way. Plus, the costs are more transparent than those of lender-paid compensation structures. This way, the mortgage broker can save you money in the long run and help you find better mortgage rates.
Below, you’ll see a list of the benefits and the drawbacks of borrower-paid compensation.
- You’ll likely get the lowest interest rate available.
- The pricing is transparent.
- It reduces the mortgage broker’s bias toward specific lenders.
- You’ll pay higher closing costs out of pocket.
Which mortgage broker fee type is best for you?
Regardless of your chosen compensation structure, you’ll pay 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 as a part of the closing costs 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 will help you avoid needlessly inflated loan payments. Plus, you won’t have to worry about whether your broker’s recommendation was influenced by the lender.
Keep in mind that fee schedules vary across different lenders and brokers. As such, if you want to get a good deal, you’ll have to comparison shop and gather enough data to make an informed choice. 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 make money from commissions. So if you see a broker advertising “no-cost” loans, you should be suspicious. Always ask how a mortgage broker is compensated if they’re not disclosing this information upfront.
List of mortgage broker fees
Mortgage fees can carry different names and vary in scope. Here are some you may encounter:
- Loan origination fees: Some mortgage brokers may simply add their fees to the lender’s origination fees. If this is the case, ask for a breakdown. Your broker may be charging origination fees as a percentage of the loan amount.
- Yield spread premium: A yield spread premium is a fee that lenders pay brokers to get their clients to agree to an interest rate that is higher than the going market rate. If you choose to deal with a broker, make sure that your mortgage rate is competitive. If your broker is not charging you a fee, someone else is paying them. It may be literally in the broker’s best interest to overcharge you on interest rates.
- Upfront fees: These fees are often charged when borrowers are looking for a jumbo loan and are usually calculated as a flat cost for setting up the loan. If your broker does not charge upfront fees, check that they aren’t getting a yield spread premium from the lender. If this is the case, you are probably being charged a higher-than-market interest rate.
- Administration fees: In some cases, mortgage brokers add an administration fee. If you see this on your mortgage agreement, you can ask your broker to waive it. Unless your credit profile is high risk (based on your credit score and credit card history), you can probably negotiate your way out of these fees.
Brokers cannot—and should not —charge you hidden fees on your mortgage, so verify that you understand all the details of their estimate and the breakdown of their fees. Additionally, they cannot influence your choice based on partnerships they have with different affiliates or provide you with misleading information. Keep in mind, however, that if the lender is paying their fees, your broker may be tempted to propose you a mortgage that’s better for them—and not for you.
What questions should you ask when choosing a mortgage broker?
Broker fees are not the only factor to consider if you decide to use a mortgage broker. You need to collect additional information to make the right choice. Make sure you ask your broker enough questions, both when deciding whether to work with them and also when negotiating the loan amount, rate, and conditions.
Here’s a quick checklist of the things you need to consider when vetting a mortgage broker and the questions you can ask them.
1. How does their application process work?
A mortgage broker should make purchasing real estate easier for borrowers. The best brokers can provide data and insight into their mortgage application process. The following information will help you compare different brokers:
- Average time to close a loan
- Third-party fees typically included.
- List of third-party companies they use (e.g., home 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 your loan application
2. Is the broker taking into account your personal circumstances?
The mortgage broker should ask you many questions about your situation and needs to find the best solution for your case. You’ll talk about your financial situation, credit history, and other loans to determine the best solution for you.
3. Are they offering a competitive interest rate and APR?
Check market rates and offers from multiple lenders to ensure that you’re getting the best mortgage rate available.
4. Are the fee costs competitive?
Total up all of the fees on the home loan and compare them to other offers. Negotiate fees down whenever possible.
5. Does the broker offer a low-cost lock-in option?
If you’re able to lock in a great mortgage rate and its accompanying terms, this can be hugely beneficial for you. Rates can fluctuate a lot, and the ability to hold a good rate with minimal cost can save you in the long term.
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. Make sure they have a vast network of partners so that you have a multitude of choices.
9. What is their track record?
Does the mortgage broker have a good reputation? How long have they been in business? Do they act in the best interests of the homebuyer? 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 a mortgage broker and choose the one that offers the best overall value.
Find the right mortgage broker for your next home purchase
Ready to start shopping for a mortgage broker but not sure where to look? We’ve got you covered.
Head over to the SuperMoney mortgage broker review and comparison page. You’ll find a collection of industry-leading brokers who you can easily compare. Read reviews, compare offerings, and cut down on your research time!
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.