Introduction
Explanation of mortgage brokering
A mortgage broker is someone who acts as an intermediary between borrowers and lenders. They help borrowers find the right mortgage product for their needs and situation.
Difference between mortgage brokers and loan officers at banks
While mortgage brokers are independent professionals who work with various lending companies, loan officers at banks only offer mortgages that are available through their institution.
Pros and cons of using a mortgage broker
One of the main benefits of using a mortgage broker is that they have access to many lenders, which can result in more competitive rates and better loan terms. Brokers can also help simplify the application process and make it less overwhelming for the borrower. However, using a mortgage broker can add an extra layer of cost to the home buying process, and the broker’s fees can vary.
Commission-based income
Explanation of commission-based income
A mortgage broker’s most common source of income is a commission that they earn after helping a borrower secure a mortgage. The commission is typically a percentage of the loan amount, and it’s paid by the lender.
How much mortgage brokers typically earn per loan
The percentage that brokers earn can vary, but it’s usually between 1% and 2% of the loan amount. For example, if a borrower secures a $250,000 loan, the broker’s commission could range from $2,500 to $5,000.
Factors that can impact their commission
The commission that a broker earns can depend on several factors, such as the loan amount, the complexity of the borrower’s financial situation, and the lender that they use. These factors can impact the interest rate that the borrower receives and, therefore, the broker’s commission.
Lender-paid compensation
Explanation of lender-paid compensation
Another way that mortgage brokers can earn money is through lender-paid compensation. This is when the lender pays the broker directly for their assistance in helping a borrower secure a loan.
How it works for brokers
The amount that lenders pay brokers for their services can vary, but it’s usually a fixed dollar amount per loan. This compensation can be disclosed to the borrower as a credit towards closing costs.
Impact on borrowers
While lender-paid compensation might sound like a benefit to borrowers, it can actually result in higher interest rates. This is because the lender is building the cost of the broker’s compensation into the loan.
Yield spread premiums
Explanation of yield spread premiums
Yield spread premiums are another way that mortgage brokers can earn money. This is when the lender offers the broker a percentage of the interest rate charged to the borrower in exchange for securing a loan with higher interest rates.
How they work
When a borrower agrees to a loan with a higher interest rate, the broker earns a percentage of the amount that exceeds the interest rate that the borrower could have qualified for. For example, if a borrower qualifies for a 4% interest rate but agrees to a loan with a 4.5% interest rate, the broker could earn a percentage of the .5% difference.
Impact on the overall cost of a mortgage
While yield spread premiums might not directly impact the borrower’s closing costs, they can result in higher monthly payments over the life of the loan.
Upfront fees
Types of upfront fees brokers might charge
Some mortgage brokers charge upfront fees for their services, which can include application fees, processing fees, and credit report fees. These fees are often meant to cover the broker’s costs of screening potential borrowers and finding the right loan options for them.
Typical cost of these fees
These fees can vary depending on the broker, but they typically range from a few hundred dollars to over a thousand dollars.
Services borrowers can expect for these fees
The services that borrowers receive in exchange for these fees can vary, but they often include a personalized loan recommendation, assistance with the application process, and the broker’s expertise in finding lenders who offer the best rates for the borrower’s situation.
Referral fees
Explanation of referral fees
Referral fees are payments that mortgage brokers can receive for sending business to other professionals, such as real estate agents or home inspectors.
How they work
When a mortgage broker refers a borrower to another professional, they can earn a fee for doing so. The fee is usually a percentage of the professional’s commission or a flat fee.
Impact on consumers
Referral fees can create a conflict of interest for the broker, as they might be incentivized to refer borrowers to a professional who will pay them the most money instead of the professional who is the best fit for the borrower’s needs.
Hybrid models
Explanation of hybrid models
Some mortgage brokers use a hybrid model, which combines commission-based income with upfront fees or other forms of compensation.
Examples of hybrid models
One example of a hybrid model is when a mortgage broker charges upfront fees for their services but also earns a commission on the loan if it closes. Another example is when a broker charges both upfront fees and a commission but offers a credit towards closing costs for borrowers who close on a loan within a certain timeframe.
Benefits for consumers
Hybrid models can benefit consumers by offering more transparency in the broker’s compensation and a combination of fees that might be more affordable than a straight commission.
Conclusion
Summary of the ways mortgage brokers make money
Mortgage brokers can earn money through commission-based income, lender-paid compensation, yield spread premiums, upfront fees, referral fees, and hybrid models.
Advice for consumers on choosing a mortgage broker
When choosing a mortgage broker, it’s important to do your research and ask questions about their compensation and services. Look for a broker who is transparent about their fees and who has a good reputation in the industry.
Final thoughts
While using a mortgage broker can add an extra layer of cost to the home buying process, it can also result in more competitive loan terms and a simpler application process. By understanding how brokers make money and choosing a reputable broker, borrowers can make informed decisions and find the right mortgage product for their needs.
