How a Mortgage Broker Gets You a Loan
Many people are going with mortgage brokers versus their banks mortgage department now days because mortgage brokers can be much more competitive and flexible than most banks. But a lot of people aren’t seeing the savings because they don’t understand how the mortgage broker market works, and they end up paying as much or more than they would have to get a mortgage at a bank because of it. I’d like to help you save a bunch by telling you how it works.
First of all, a mortgage broker or the company he works for (typically they are independent contractors) keeps your entire “application fee”. So whatever a company charges you to apply, just pays them to “check with the lenders” to see if they can get you a loan. Don’t get me wrong, I’ve got nothing against mortgage brokers getting paid for what they do, I’m all for that. I just don’t think they should misrepresent where that money goes, because most of the time it goes straight in their pocket.
Secondly, they get paid again on the backend by the company that actually funds the loan (which usually in turn sells it to Fannie Mae or Freddie Mac if it’s conforming). Now how much they make on the backend is determined by the loan amount and the percentage rate they give you on the loan. Yes, that’s right, I said, “They” give you, that is, the mortgage broker.
Each mortgage broker has a bunch of companies they can submit your loan to. They have a current mortgage rate list in their office that is sent to them by the mortgage funding companies they work with. That rate sheet tells them what types of loans they can do, what the base rate is for each type of loan, and what the “hits” are they have to tack on to the interest rate depending on the situation.
So let's say you’re buying a $100,000.00 home. The base rate for a mortgage funding company might be 6 percent interest if you have 20% to put down on the home. But let's say you have only $10,000.00 to put down. You’re going to take a hit for that that may be .25% so the best rate they can give you now is 6.25%. Maybe you don’t have anything to put down, you may take a .5% hit for that and the best rate you can get is 6.5%. There are a variety of things you may take a “hit” for and they are specific to the mortgage funding company. The mortgage broker's job is to find you the best funding source where you’ll get the best rate and take the least hits.
Now just because the mortgage broker can get you 6.25% or 6.5% doesn’t mean that he’s going to give it to you for that. The man has to eat you know. It varies greatly by broker, but typically a mortgage broker wants to make at least $1,000.00 - $2,000.00 on a loan. So maybe he charges $300.00 or $500.00 for the “Application Fee”, then he needs to make the rest on the backend and the more work you make him do, the more likely he is to sock it to you here. If you walk in with your paycheck stubs, your w2’s, bank statements, credit report info, and all the rest of the info he needs to get you the loan and he doesn’t ever have to call you or worse hound you to get the info he needs for the funding company, you may have some negotiation room here which will get you a lower rate, and save you lots of money on your loan. The more you make him work, the more he deserves the money he gets.
The main thing you need to know is that most everything with a mortgage broker is negotiable to a certain extent. There’re really no need to pay more than $500.00 for a application fee in most markets (the biggest cities are probably the only exception, but even then brokers are licensed by state, so if you have to go out of town for a broker, he’s still probably working with the same companies that your in town guy is working with but for less money.) And if you’re buying an expensive home through a mortgage broker, ask him what the base rate is for the lender and what you’re taking hits for. If he won’t tell you, I would go somewhere else. He’s not going to get into trouble for letting you know up front what his cut of it is. But please, don’t try to cut him out of making his money. He’s got a family to feed too, if you’re that interested in cutting out the middle man as much as you can, you can always go to LendingTree
 or one of the other online mortgage brokers.
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Is There a "Right" Mortgage Broker for You?
The short answer is yes. Different brokers have different "ideal customers" because they work with different companies that have very diverse offerings based on what type of mortgage you need and what kind of credit you have. For instance if you have really great credit, a Broker may or may not be able to get you the "Best Rate and Terms" possible because the companies he works with deal more with "Average" people. The same can be true if you have a really low credit score. There are companies that specialize in those types of customers and your Broker may or may not have access to those companies, so it ALWAYS pays to shop around and see what more than one company is offering. Even if you end up back where you started, at least you know you're getting the best deal you can get.
Now if you're really savy, you know that mortgage brokers are licensed in the state that they work in, so if you live in a rural area you can check on rates with Brokers in the bigger cities in your state. If you live in the big city, you'd do well to check on what a small town Broker can do for you. You may get better service as well as get a lower rate or lower application fees.
The main thing is, kiss a lot of frogs, and you'll find the prince of a Mortgage Broker who will get you the best deal possible.
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Bad Credit Means Paying More, Unless...
For a mortgage company, choosing whether or not to give you a mortgage is all about figuring out whether you're a good investment or not. Most people think that it all comes down to the credit score, but that's not always the case. Even if you have a really low credit score, you can probobly still get a mortgage, you'll just need to do a few extra things to show the mortgage company that you're a safe investment.
The first step is to have more funds. Not necisarily a larger down payment, but having some savings in the bank, like 3 to 6 months living expenses, shows the mortgage company you can ride out some lean times. When your mortgage company asks for a copy of your bank statements, make sure that the statements show your emergency savings as well as your other funds. Another thing most companies will let you do is buy down your rate. By paying a little more up front, you can save yourself thousands in interest. Beefing up your down payment is a sure fire way to look better to a mortgage company. The bigger percentage of the home value you put down up front, the safer the mortgage company feels about the investment they're making. For most mortgage companies, 20% is a magic number because the number of forclosures on homes that have equity are very low compared to homes that have very little or no equity.
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