Buying your first home can be overwhelming. The process seems to involve endless steps, meetings with banks and credit unions, home visits, meetings with real estate agents, negotiations, closing costs — and that’s before you even get to the point of actually moving into the place.
One option that many home buyers hear about but often don’t fully understand is the option of using a mortgage broker to find a good mortgage. What is a mortgage broker? How does the process work? What are the benefits — or the drawbacks — of using one? Let’s dig into what mortgage brokers offer to find out more.
What is a mortgage broker?
A mortgage broker is a person whose mission is to help you find the best mortgage. Typically, a mortgage broker has arrangements with a bunch of different financial institutions and can present offers on the behalf of each of them based on your credit history and other information.
Ordinarily, if you are getting a mortgage without a mortgage broker, you’d go to several different financial institutions in order to get a firm quote on a mortgage. At each one, you’d fill out paperwork (often just repeating the same information at each institution), they each run your credit history, and each one presents you with a mortgage offer – how much they’ll lend you at a certain interest rate.
[Read: Best Mortgage Rates in 2020]
With a mortgage broker, you meet with one person and fill out that information once. Then, on your behalf, the mortgage broker communicates with several banks to get offers from them, then presents the offers to you. They are typically paid by commission from the bank that you end up selecting.
Speaking from experience, the process is really pretty painless. The broker gets what information they need from you and takes care of the rest of it. You come back later, have some options on the table, and either choose one or walk away from the offerings.
Be aware that mortgage brokers are not actually pre-approving you for a mortgage. Rather, they’re typically pointing you to a bank or other financial institution that will then guide you through the pre-approval process. The broker is simply showing you an offer you should strongly expect from that bank.
Pros and cons of using a mortgage broker
The benefits of using a mortgage broker are pretty clear. A mortgage broker lets you effectively see a bunch of mortgage offers at once while only filling out one set of forms. It’s a very efficient way to find a pretty good rate on a mortgage. A good mortgage broker will provide this service, point you toward the best mortgage, and guarantee the offer that they’re presenting to you.
There are several drawbacks that you should be aware of, though.
First of all, the broker’s interests may not be aligned with yours. Remember, a mortgage broker is generally paid via commission from whichever financial institution you select for your mortgage. That means that, if one bank is offering him a better commission, then the mortgage broker has a financial incentive to highlight offers from that particular bank.
A quality mortgage broker will genuinely try to steer you toward the best mortgage for your situation, but that may not actually be in line with what’s financially best for that broker. Over the long term, a broker that steers people toward the best mortgage for them, even with smaller commissions, will build a stronger business, but some may instead give preference to the ones that give the broker the most money, which may not be the one that’s best for you.
Another problem is that mortgage brokers may not guarantee the estimates they provide you with. Remember, a mortgage broker is not preapproving you for a loan. Rather, they’re providing you with a pretty strong estimate of what a bank will offer you. You may find that the broker describes an offer that works well for you, only to discover that the bank itself won’t approve you for that offer and gives you a modified one instead. If a broker won’t guarantee the offer they’re presenting you with, be careful.
When should I use a mortgage broker?
You should use a mortgage broker if you feel that your search for the best mortgage lender for you is turning up short. For borrowers with bad credit, a mortgage broker can bring up offers that you wouldn’t find otherwise. However, you should use a mortgage broker as well as searching for mortgages through banks or credit unions on your own. If the broker finds something better than what you were able to find on your own, then by all means, accept the offer that the broker brings to you. If they’re a quality broker, they probably will find you a great offer.
On the other hand, if the offer you get directly from a financial institution you prefer is as good or better than the offer the broker finds for you, then go with the one you got directly.
Too long, didn’t read?
Remember, the goal of using a mortgage broker is to find the best mortgage for you, nothing more. Many mortgage brokers will help you find a very good mortgage. However, taking the additional step of applying for a mortgage with a few financial institutions directly not only provides a check on the mortgage broker, but gives you a few more options to consider. Consider a mortgage broker as another tool in your mortgage-shopping toolbox, but recognize that not everything is a nail just because you have a hammer.
Last updated August 6, 2020 – Updated editorial advice for 2020’s unique housing market.
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