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A mortgage broker is a licensed professional who gathers borrowers' financial documentation, compares rates, and connects them with lenders to facilitate a home purchase or refinance an existing mortgage.
Using a broker is entirely optional, and many buyers prefer to just work with lenders directly. However, for borrowers who want guidance from an industry pro, a mortgage broker can be a helpful resource that generally costs a small percentage of the loan amount.
How mortgage brokers profit from transactions
Mortgage brokers can work independently or belong to a brokerage. They typically earn a commission of around 1%-2% of the loan value, which the borrower or the lender can pay. When you take out a larger loan, your mortgage broker makes more money.
A mortgage broker's total compensation can be paid through various means, including cash or an addition to the loan balance. If a borrower pays the broker, they will do so at closing. However, if a lender pays, this fee is sometimes rolled into the loan cost — meaning the borrower may still be on the hook. Different brokers have different fee structures, so before you work with a particular one, you'll want to make sure you fully understand how they charge.
How much money do brokers make?
Because a broker's job is commission-based, they are paid by the transaction. So, for example, a broker who charges a 2% rate to close a loan valued at $250,000 would earn $5,000.
Factors like the local real estate market and the broker's experience level can significantly impact how much they earn. For example, according to ZipRecruiter, the average annual salary for a mortgage broker in Alabama is $61,458, while the average broker in Hawaii makes $81,487.
A qualified mortgage broker must complete 20 hours of coursework and take the SAFE Mortgage Loan Originator Test. This exam consists of 120 questions covering federal law, state laws and regulations, mortgages and mortgage loan origination activities, and ethics.
Avoiding mortgage broker fees
Whether you choose to use a broker or not, getting multiple mortgage quotes is likely to translate to actual savings. According to a 2018 Freddie Mac report, borrowers save an average of $3,000 over the life of the loan by getting at least five quotes from lenders.
So for borrowers who don't have the time or ability to research loan options independently, the savings delivered by obtaining a range of estimates from a mortgage broker can help offset the broker's fees. But if a broker's commission comes out to more than $3,000, you may want to consider switching to someone with a different fee structure.
For example, a broker that charges a 2% rate on a $250,000 loan would receive $5,000, but a broker charging a 1% rate would only receive $2,500. Of course, this is only an average and every case will be different, but calling around to multiple brokers could mean that you'd retain more of your savings from finding the right loan. Borrowers could also elect to bypass the broker entirely.
Many online resources enable home buyers to research loan options themselves and avoid paying mortgage broker fees. Mortgages are not one-size-fits-all, and a borrower's circumstances can help narrow their search. For example, some lenders specialize in working with first-time home buyers, while borrowers with little saved for a down payment may want to compare lenders that offer FHA loans.
Whether you enlist the help of a mortgage broker or decide to work directly with a lender, each path has its benefits and drawbacks. By evaluating your own needs as a borrower, you can determine whether or not working with a mortgage broker is right for you.