What is a Mortgage Broker?

The right mortgage broker arranging your home loan can save you thousands of dollars from unnecessary points and junk fees. The wrong mortgage broker could turn your home loan into a train wreck that could take years to recover. What is a mortgage broker? Someone you should approach with a healthy dose of suspicion. Here are several tips to help you find the right person to arrange your next home loan.

Mortgage Brokers Are Salespeople

Brokers originate home loans for lenders, receiving a commission for their work. The mortgage broker’s job is to connect you with the best lender for your situation, be it purchase or refinancing. The problem is many mortgage brokers have earned a bad reputation as sleazy sales types out to earn a commission at your expense.

Ideally your mortgage broker serves as an impartial intermediary between you and the bank:

You < –> Your Mortgage Broker < — > The Bank or Lender

Mortgage brokers can be described as selling you retail home loan products from wholesale lenders and banks.

Mortgage Brokers Work For You

Many homeowners skip the middleman by going to their bank or a so-called direct lender. This strategy eliminates the mortgage broker in name only as you still pay a loan origination fee. Skipping the mortgage broker won’t get you wholesale purchase or refinance rates either. There is no cutting out the middleman when it comes to mortgage loans. You’ll pay one way or another.

Since you’re going to be paying for loan origination anyway why not find the best mortgage broker to arrange your home loan? The right person works for you gathering important documentation about your home, income, employment and credit making sure you sail through underwriting without a hiccup. The mortgage broker can also place you with the lowest cost mortgage solution for your situation, educating you along the way.

How Do Mortgage Brokers Get Paid?

Your mortgage broker gets paid form one of two sources. They can charge you a loan origination fee which you’ll pay out-of-pocket at closing, OR they can accept lender paid compensation in the form of Yield Spread Premium. Many homeowners incorrectly think that the government outlawed Yield Spread Premium; however, the government only prohibited charging you for loan origination and accepting Yield Spread Premium from the lender.

So what’s Yield Spread Premium? Simply put, it is cash paid by the lender for the broker marking up your mortgage interest rate. This cash can be used to pay your origination fee and closing costs depending on how much markup you’re willing to accept. Yield Spread Premium is what pays for those “No Fee” refinance offers you see lenders advertising.

Use Your Mortgage Broker to Rate Shop

The main advantage of using a broker to arrange your home purchase or mortgage refinancing is the ability to leverage their contacts and experience to get you the lowest mortgage rates. Brokers can weed through lender junk fees and unnecessary discount points to get you the best deal. The problem is there are mortgage brokers out there that abuse their position by overcharging their origination fee.

Bad mortgage brokers are easy to spot. If yours is too busy selling home loans to process their own paperwork and charges you for a third-party loan processor you should consider taking your business elsewhere. You want a mortgage broker that’s going to give your home loan the attention it deserves without overcharging you.

It’s a good idea to shop around from several brokers before choosing one to arrange your home loan. Different mortgage brokers will have different connections with lenders that others won’t. Be sure and ask what lenders a broker works with before choosing one.

How Much Should You Pay Your Mortgage Broker

If you’re paying the origination fee yourself and not taking higher mortgage rates for Yield Spread Premium a reasonable amount is one percent of your home loan amount. Keep in mind that loan origination fees are negotiable and vary from one mortgage broker to the next. Don’t be afraid to haggle with the person arranging your home loan to get the best deal. Remember the less you pay closing on your new home loan the more benefit you’ll get from today’s low rates, especially when refinancing.