There is a lot of debate about how you should go about getting your mortgage. Should you use a mortgage broker? Should you go to your bank for a mortgage? Is there really a difference between a mortgage broker and a bank?
In many ways, yes.
This article will help you get a more complete understanding of both ways of getting your mortgage and offer you some tips should you go the mortgage broker route.
What is a Mortgage Broker?
A mortgage broker is someone who works between you and multiple lending institutions to help find you (the borrower) a mortgage. They are the ones who will take in your personal financial information and go to various lending institutions (banks, credit unions, etc…) to get you the best possible loan.
Do Mortgage Brokers Use Their Own Money?
No, typically a mortgage broker is the liaison between you and the banks, credit unions, and other lending institutions, they do not use their own money in coming up with your mortgage.
What is a Direct Lender?
For all intents and purposes, a direct lender is a place that is lending you money. Typically this is a bank or credit union, though if you are going through private lending it is whoever is lending you the money. The reason they are a direct lender is that you go to them directly rather than going through a third party, such as a mortgage broker.
Should I Get a Mortgage From my Bank?
For some reason, many people have a sense of security from dealing with a bank that makes them question using a mortgage broker. Many people tell me they want to use the bank they’ve been using since they were a kid, the bank that their parents have been using for 30 years.
This may be easier, but it could end up costing you a lot more. Even a half of a percent higher interest rate can cost you tens of thousands of dollars over your mortgage. Bottom line: You can get a mortgage from your bank, but make sure it’s the best rate and terms you can get.
Mortgage Broker vs Direct Lender: Which is best?
Trying to decide which is better when you are comparing mortgage broker versus a direct lender, like your bank, is tricky.
On one side, the mortgage broker is supposed to find you the best mortgage for your situation. They can take into account things like how long you plan on owning your house. What your plans are for paying off the mortgage. Things like stage of life, family situation, health and other items can all help a mortgage broker decide which one is best.
Your bank on the other hand, already knows your financials, and from many people say, they will make you one offer and it’s up to you to take it or leave it.
Not always the best situation.
But it will likely be a lot faster because they have all your information already.
Personally, I have always used a mortgage broker. They always found me a good rate and favorable terms on my mortgage. I also like the idea of lenders competing to get my business, rather than the take it or leave it attitude I have seen from banks in the past.
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How Do Mortgage Brokers Get Paid?
Mortgage brokers are paid by whatever lending institution or bank they end up getting you a mortgage with. The mortgage broker acts as a salesperson or liaison for dozens of different lenders and they get a commission from those lenders when they sell one of their products.
The big banks and lenders can afford to do this, because by working with mortgage brokers, they need to hire fewer staff who work directly for them selling mortgages. As a bonus, they only have to pay the mortgage brokers when someone signs a mortgage.
Another bonus for the banks and lenders, is that they can have mortgage brokers as partners nationwide, giving them much more reach without having to build additional brick and mortar banks and offices.
Do I have to Pay a Mortgage Broker?
If the lending institution aren’t willing to cover the mortgage brokers fee for what ever reason, then you will need to cover the mortgage brokers charges from your end. This is something you will cover when interview mortgage brokers.
What are the Mortgage Broker Fees?
A mortgage brokers fees can range anywhere up to 3% of the mortgage amount. There is such thing as a lender paid compensation (bank/lending institution pays) and a borrower paid compensation (you pay). When you speak to your mortgage broker you will want to clarify which one they are.
When you are looking for your first home, it’s best to go with lender paid compensation, unless your personal situation requires additional work on the mortgage brokers part.
What are the advantages of using a mortgage broker?
There are several advantages in using a mortgage broker. The first is that they will gather up your information and go to the different banks for you. Since their typical way of getting paid only happens when the mortgage is complete, they are incentivized to get you a mortgage.
You get the best rate for your situation
Mortgage brokers have access to dozens of lenders, allowing them to make sure you’re getting the most competitive rate available.
They know that getting a good rate is at the top of everyone’s list, and they know that even someone with little knowledge of mortgages is going to have a good idea of where the current bank rates are sitting.
This forces them to stay on their game and make sure their customers are getting the best rates possible.
Remember, the business of selling mortgages is a competitive game, where referrals go a long way. It’s in their best interest to ensure you get the best service and the best rate.
Mortgage brokers are less strict than banks
When you sit down to apply for a mortgage with a bank, they plug all your numbers into a computer and see what comes out. A mortgage broker deals with so many different lenders who all do their own calculations, that each differs slightly from one another. This usually results in many more options and ones that aren’t so black and white.
They stay up to date on all of the latest products available
Mortgage brokers are always shopping for the best deals, and because they live and breathe this every single day, they always have the latest on what’s available. They also know, that the rate isn’t the only important thing when it comes to mortgages – different mortgages suit different people, and a broker can help you find the best one for you.
Mortgages for first time buyers can be different, in comparison to remortgaging or buying a 3rd home. A broker has access to the different lenders and can find out which one offers the best incentives for first time buyers. They’re not restricted the same way a bank is, with only whatever products are offered at that specific bank.
They only get paid if you sign a mortgage
I know in today’s society, we’re taught to hate commission sales people, but, in this case, I love it. I like knowing that this person needs to do their job and find a mortgage that makes me happy if they want to get paid.
I think it helps to know, that at any point, I can walk away and go to a different broker or bank to get my mortgage, which is likely a very motivating driver to succeed.
They’re basically like a small business person who relies on sales and referrals to succeed, and I like that. This usually increases the level of customer service you’ll receive and makes for a much more enjoyable experience overall.
When Should I Use a Mortgage Broker?
Buying your first house, or your next house, is a great time to use a mortgage broker. They can help you find financing when others may turn you down (see the Millennial Home Buyer Story below). Either way, it can’t hurt to contact a mortgage broker, or use an online mortgage place (like Lending Tree) to see if there are better rates available to you.
What are the Disadvantages of Using a Mortgage Broker?
The biggest disadvantage of using a mortgage broker is that they can use banks that may not be the absolute best for you because a certain bank may offer a better payment to the broker. This is best to discuss with the broker when you are sitting down with them in your first meeting, or even before you first meet.
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How to Find a Mortgage Broker?
If you are looking for a mortgage broker and aren’t sure where to start you can try these places.
- Friends and Family
- Real Estate Agent
How Do I Choose a Mortgage Broker? (in 3 Easy Steps)
Step 1: Get a list of potential mortgage brokers
Come up with a short list. From asking your friends, family and other methods of research come up with a list of 3-5 mortgage brokers that you think might be suitable for you.
Step 2: Email them to see how they handle your intro
With that list you will want to send them the following email (or message via their website, avoid doing this on social media). The idea here is to get an idea of how they will interact with you. You want to see how long it takes for them to get back to you and if you get a good feeling from them.
That might sound a little woo-woo, but trusting your gut can really factor into this process. After all it’s the biggest purchase of your life and you don’t want to work with someone who gives you a bad feeling.
Here is the email for you to send. Remember this is just to get a feel for them, you will conduct an interview with
My name is (your name), and I’m in the process of buying a home. You were referred to me through (referral’s name) and I was hoping that you could answer a couple of questions. I’m a first time home buyer and I’m trying to get everything ready for when it’s time to me to purchase a home
Do you work with people who live (where you live) and first time home buyers?
What is the current variable rate and fixed rate for a 5 year mortgage?
How do you get paid and what is the process when working together?
I really appreciate your response and don’t want to take up too much of your time.
Step 3 Interview the remaining candidates
By now you will have gone back and forth with a few mortgage brokers and are ready to pick one. Next you will want to interview your remaining people so you can pick one
Here are the Questions to Ask Your Mortgage Broker or Banker – Overview
(These first few questions you already asked, but you are looking for continuity in their conversation)
How do you get paid?
You want to ask this question to find out how your broker makes their money. It’s best to get it out in the open right away. Normally, they will be paid by the lending agency with a referral fee, so it doesn’t cost you anything out of pocket.
What are the current rates for a fixed rate mortgage?
A good broker should know these rates or have access to them in a few seconds. This is a good question to ask to see how they respond.
*Tip: write down what they tell you, so you can reference this quote later, if need be.
What are the current rates for a variable rate mortgage?
Again, see how they answer and make a note of the rates.
How much of a down payment will I need?
Depending on your situation, it will be a range starting at 3-5% and go up from there. We dive into this topic as part of our first book.
Are there any programs available for first-time homebuyers to help with the down payment?
Depending on where you are in the country, there are various incentives and rebates for new and first time home buyers. A good mortgage broker will know what is available to you and be able to tell you about your options.
Can I put extra money down on my mortgage directly onto the principle? Will this incur extra charges if I do?
It’s always good to know what kind of pre-payment and extra payment options you have available to you and what it will cost. You will likely be making more and more money as time goes on, so it’s a good idea to know your options.
What lengths of terms are available for fixed and variable rate mortgages?
These will vary. Make a note of what is available to you.
If I go with a variable mortgage, can I lock it in at any time?
Although you may not be interested in this right now, it’s a good thing to know.
What are the consequences if I pay off my mortgage before the term is up?
Each mortgage will have different terms and clauses. By asking what clauses exist for different types of mortgages, it will help you understand more about what you’re getting into.
Do you work with any real estate agents you can recommend?
It’s always good to see who they recommend, you can also ask if there is anyone who you should avoid.
Related: How to pick a good real estate agent
Do you have any lawyers you can recommend?
Recommendations between professionals hold a lot of value for me. Generally speaking, professionals want to recommend other great professionals. It looks good on them and makes everyone’s life easier.
Related: How to find a lawyer when buying your first house
What documents will you need to process my pre-approval?
This will be a big part of the process. You will need to get pre-approved for your mortgage before you get serious about looking. You can always apply with an online mortgage broker to get started, but you need to make sure you have the relevant documents when it comes time to apply.
Can you please complete a pre-approval, so I have a budget for my home?
You will want to do this to make sure you know what budget you’re working with. While we cover this in more detail in our other ebook, remember that they will approve you for the amount they are authorized to lend you, not the right amount to suit your budget.
There is a world of difference in these two numbers (which is why we did a separate book on it), so make sure you have completed your budget and are an expert in your own finances.
It’s not the mortgage broker or banks job to make the financial decisions for you and more importantly, to advise what you should be spending and can afford.
Their job is to tell you what the maximum amount is that they can lend and it’s your job to make sure it all lines up with you finances. Sometimes the number they provide is much higher than what you should be spending.
Millennial Home Buyer Story
Here’s one Millennials experience with getting their first mortgage.
When I applied for my first mortgage, I was young with a short credit history, and when I sat down with the bank, they proceeded to tell me that I had poor credit and I could only qualify to borrow $50,000.
Feeling frustrated, I went to visit my real estate agent to deliver the bad news. “Don’t sweat it,” he said and then proceeded to pick up the phone and call a mortgage broker that he dealt with all the time. He made an appointment for me half an hour later.
I walked into the meeting feeling nervous and like I was about to be disappointed again, but then the broker told me I had great credit for someone my age, and that it would be no problem to find a mortgage for up to $150,000.
That was triple what the bank said!
How was that even possible I wondered? I realize that today, $150,000 wouldn’t get you very far, but at the time I was buying it gave me plenty of options.
Needless to say, I left her office on cloud nine and eventually signed a mortgage with that broker and recommended her to everyone I knew.
It wasn’t just the fact that she was able to get me a mortgage when the bank all but said no, it was also how kind and understanding she was of my situation and how at ease I felt about the whole thing after I left her office.
You can’t replace the feeling of confidence (and human connection) in these types of situations.
So, now that you’ve got my opinion on mortgage brokers, go check it out for yourself! Don’t simply take my word for it. Go talk to a broker and see what they have to say.
It’s nice to build these relationships before you have a pending home offer on the line. Buying a home takes a team of people, and even if you’re not ready to buy today, you can still start building your dream team.