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Enlisting a mortgage broker can make the homebuying process run more smoothly. Brokers connect buyers with multiple lenders, handling the legwork of shopping for loan terms on your behalf, typically in exchange for a fee of 1% to 2% of the loan amount. But because brokers have a financial incentive tied to the loans they place, it pays to know how the relationship works before you commit. Here are some tips to make sure you’re getting a fair deal.
Consider working with a financial advisor as you explore the best way to get a mortgage.
1. Vet Your Broker Before You Commit
Before you hand over any personal or financial information, take time to verify that the broker you’re considering is properly licensed and has a clean track record.
Start with the Nationwide Multistate Licensing System (NMLS), a federal database where you can confirm that a broker holds a valid license in your state. Any broker operating without one is a red flag you should not ignore.
From there, check their Better Business Bureau rating and search your state attorney general’s website to see whether any complaints or disciplinary actions have been filed against them. A quick web search for consumer reviews can also surface patterns of behavior that don’t show up in official records.
This due diligence takes less than an hour and can save you from a costly mistake. A broker should be working in your best interest, but that relationship only works when you start with someone you can trust.
2. Understand How Mortgage Brokers Are Paid
Mortgage brokers can either be paid by the buyer or the lender. This fee is typically 1% to 2% of the loan amount. So for a $250,000 mortgage, the fee would range from $2,500 to $5,000. This fee can either be paid up front or rolled into the home loan.
Having the lender cover the broker’s fee may seem like the better option, but there may be a catch. A broker may accept a higher fee from the lender in exchange for negotiating a more expensive mortgage rate. That means you, the buyer, could end up paying more interest over the life of the loan. So shelling out a few thousand dollars for the broker’s commission might be worth it.
Compare mortgage rates now.
3. Compare Loan Terms
You can save a lot of time by shopping for a mortgage through a broker. But just because they’re doing all the legwork doesn’t mean you should accept what they offer at face value. If a mortgage broker is putting their interests ahead of yours, you could be missing out on a better deal elsewhere.
It’s a good idea to do your own homework and take the time to evaluate different loan options. If your lender’s paying your broker, you’ll need to find out whether the yield spread premium would be lower if you took a different mortgage route.
The yield spread premium refers to the commission the lender gives the broker for locking in a higher interest rate. If you’re working with a legit broker, they’ll give you an honest answer about whether another loan would be cheaper. If the broker tries to dodge the question, you might need to look for another mortgage.
4. Ask for a Guarantee
Within three days of applying for a loan, you should receive a loan estimate, which details the basics of the mortgage you’ve applied for. That includes things like the size of the loan, your interest rate and the estimated cost of taxes, insurance and your monthly payment.
If the mortgage terms fit with what you’re looking for, you can ask the broker to guarantee the interest rate and the different costs required to close. While they’re not obligated to do so, a broker might be willing to assure you that you’ll get the terms you’re being quoted.
5. Get Quotes from More Than One Broker
Just as you would compare rates from multiple lenders, it’s worth approaching more than one broker before committing. Different brokers have relationships with different lenders, which means the loan options available to you can vary from one broker to the next. Getting a second quote may also give you leverage. If a broker knows you’re comparison shopping, they may have more incentive to put their best offer forward. It takes more time upfront, but it could help you confirm you’re getting a competitive deal.
Related Article: What Is a Mortgage Broker?
Bottom Line
One of the best ways to avoid a mortgage broker scam is to check them out before you enter into a relationship with them. You can look at their Better Business Bureau rating and check with your state attorney general’s office to see if any complaints have been filed against them. If nothing turns up, you can scan the web for negative consumer reviews that might shed some light on how a particular broker operates.
Tips on Finances
- A financial advisor can offer valuable insight and guidance on handling debt, whether that be mortgage debt or other kinds of debt. Finding a financial advisor doesn’t have to be hard. SmartAsset’s matching tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use our no-cost mortgage calculator to get a quick estimate of your monthly mortgage payment with taxes, fees and insurance.
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