Do you think that all Mortgage Brokers are the same from the perspective of real estate investors? No, they are not. Mortgage brokers vary as per the needs and the strategy of any real estate investor. For real estate investors, mortgage brokers are often essential in times of need, such as when they want to buy a property or refinance existing debt but do not have the necessary funds to fund for themselves. They will thus take the help of a mortgage broker that suits their needs and get the loan they require for purchasing or refinance the property.
This article will look at the circumstances when Mortgage Brokers become different from each other and explain why they become different.
Let’s start by defining who is a mortgage broker.
What is a Mortgage Broker?
A mortgage broker is someone who manages the mortgage loan processes without using any funds of their own (company) throughout the scenario at hand. They can also be known as the intermediary or the middleman who connects borrowers with lenders.
Hiring a mortgage broker may come as a benefit since they are experienced and skilled enough to be able to help you find the best-suited deals as per your need.
In traditional times, banks and other lending institutions were more likely to give out loans to borrowers in times of need, but since we have been moving towards a much more advanced and modern time, the usage of mortgage brokers has become a large part of real estate industry.
Looking into the various mortgage broker markets, United States, Canada, United Kingdom, Australia, and New Zealand stand to be some of the largest. The United States has a 5.5% increase in the annual number of mortgage brokers from 2016 to 2021.
Hiring a mortgage broker becomes necessary to make sure one gets the top deal with a minimal interest rate and to their own benefit. They are connected to various lenders and have been trusted by people beforehand in terms of striking deals. This is why you will get reliable lenders for your mortgage needs without going through much trouble from your end.
When Should a Real Estate Investor Use a Mortgage Broker?
A real estate investor is someone who often buys property in the hope of an increase in its price (capital gain) so that he can resell it for a profit. Keeping this in mind, real estate investors may sometimes need the help of a mortgage broker to process deals.
Firstly, real estate investors should resort to using a mortgage broker when starting their business, for example, when planning to purchase an investment property under a Trust. This is a crucial moment since they will need to purchase several properties’ overtime to sell them later on and will thus require loans. In the course of time, some loans needed refinancing. In this regard, a mortgage broker could be of service to them. They can also refer to a mortgage broker when they need refinancing later on.
In addition to this, a mortgage broker often has better rates than what is expected. They may be able to get cheaper deals in terms of loans since they have expertise in lending and mortgages. They may even be able to get you current rates better than ‘your bank’ since they are in direct contact with several lenders, including banks and non-bank lenders, and have a variety of options.
Advantages of Using a Mortgage Broker
You may often doubt hiring a mortgage broker to find better deals yourselves, but hiring one provides many benefits.
- Greater access to lenders and lender products
The first benefit that mortgage brokers bring forth for us is greater access to lenders. When we set out to look for lenders, we never know where to find advantageous deals that fulfill our requirements. For example, leading mortgage brokers in Australia such as Aussie and Mortage Choice are dealing with about 40 financial institutions and thousands of fiance products.
- Access to mortgage manager networks
Hiring a mortgage broker is also beneficial since they are already connected to several pre-existing mortgage broker managers and can connect us to those who suit our needs best.
- All the paperwork is taken care off
Moreover, when you hire a mortgage broker, you can stay stress-free since they will manage all that needs to be done. This not only saves time but also saves the amount of leg work you would have had to put in finding the right lender for yourself. In addition, the mortgage broker will also take care of all your legal work and documentation, enabling you to a hassle-free process and thus a peace of mind throughout.
- Expert advice will help you to protect your credit score
Furthering the benefits a mortgage broker brings, one key advantage is the expertise as a mortgage broker. Adding onto the fact that they provide you with a personalized service catering to all your needs, they also give you expert financial advice and strategies to understand which deal stands the best for you in terms of saving money, avoiding any hidden costs and ease the process of purchasing your next investment property in years to come.
- Guidance beyond your mortgage application
Lastly, when you hire a mortgage broker, they are solely responsible for managing your fees. They provide you with the flexibility to choose whenever you need their services, and they will make sure that they are always available for you. They will also enable you to stay safe and get the essential insurance required before striking any deal with a lender to guarantee no losses in the long run.
- Usually, no cost to you – their service is FREE
After all, most mortgage brokers provide their service to you at no cost to you. They usually receive a commission from the lender, so this means, they will charge you $0.
Based on our experience, if you have a complex property portfolio with over 10 properties’ attached to over 10 lending products, your mortgage broker may charge you something extra in addition to the commissions they receive directly through the lenders. Their service is still worth it!
Disadvantages of Using a Mortgage Broker
Although the benefits are several, there are still some setbacks to using a mortgage broker, which may be why you depend upon yourself to find a lender.
Trusting a mortgage broker may be difficult for you since you lack familiarity. Keeping this in mind, it is even harder to pay them when you do not trust them enough. However, this ‘trust’ matter is everywhere, and it’s up to you to find a trustworthy, reliable broker who delivers.
- You may be asked to pay a fee
When you hire a mortgage broker, you are required to pay them a certain fee sometimes, especially if you have over 10 properties’ with mortgages attached. This is necessary for utilizing their services as your broker may need to spend more time with your application compared to another (e.g. first home buyer) and may lead to a greater cost of borrowing than it would have otherwise. Some mortgage brokers may also search for maximizing their compensation and thus pass you a loan product with a higher commission for them.
- Unethical practices
Keeping this aside, there may also be mortgage brokers with different interests than what you already had in mind. They may be finding the best deals for you while also keeping their own benefit in mind in terms of making connections, and so you may be ripped off without realizing it. There will be this constant uncertainty of whether you are getting the best deals since you will be working with an intermediary disclosing the details regarding the deals instead of your own self-research, which may translate as a disadvantage.
- You may not have access to all lenders in your country
Similarly, certain lenders may not work with mortgage brokers, especially small lenders and credit unions. This may lead you towards putting in extra effort since mortgage brokers require excess documents while also not getting the best deals since you did not put in efforts to do some market research beforehand. Missing out on the lenders who do not work with mortgage brokers will only enhance the regret of your decision.
How Can a Mortgage Broker Rip You Off?
There are several methods that a mortgage broker could rip you off if you do not find the right one who has the correct intentions towards working with you.
One of the most common techniques that they use for self-gain is by signing you in for a mortgage product with an excessive interest rate at closing as to what you have previously agreed upon. Variable interest rates may fluctuate over time due to inflation and economic development. By this point, your deal is almost finalized, and backing out will only lead to you losing your property offer since only a few days will be left to be able to pay for it (i.e. settlement day).
To avoid this inconvenience, there is a protocol for locking the interest rate you agreed on. However, a mortgage broker who plans to rip you off will not tell you about this policy of locking your interest rate and will thus ultimately your loan product will start charging you a much greater interest rate at closing or after a few months after the settlement. This will then lead to more financial loss for the borrower than what they have gained as an advantage to hiring the mortgage broker.
Another method a fraudulent mortgage broker may also adopt towards is that they will initially make a deal with you and accept your application without informing you whether you qualify for the mortgage or not (i.e. whether the lender has accepted it or not). Keeping this in mind, after evaluation, even if you do not qualify for the mortgage, these brokers will still charge you for their own services and thus ripping you off.
Not only this, but certain mortgage brokers will present their deal in a very attractive way but then resort towards high closing costs than what was agreed upon. This may be translated as an additional loan processing fee after they have taken the agreed-upon money or many other terms that were not mentioned beforehand. Thus, a dishonest mortgage broker will look for their own benefit instead of you and rip you off.
How To Ensure You Are Not Ripped Off?
Getting ripped off from a mortgage broker has become far more common than we can comprehend at this point in time. To avoid any trouble in these regards, we should be aware of several aspects.
- Know how your mortgage broker get paid
One of the core things that we need to understand is the means of payment for the brokers. If they charge a constant commission from the lenders on the total loan amount, they will be trying to get you the highest loan possible. However, they may rip you off and portray a smaller amount as to what the original is; thus, you need to understand their means of payment.
- Spend some time doing our own research about the product your broker suggested
In addition to this, a mortgage broker may get you a very attractive deal at first glance. Nonetheless, understanding and comparing the loan terms with what you learned through self-research is often necessary to ensure you are not getting ripped off and paying far more in the long run.
When you solely depend on the mortgage broker, we do not know the basic interest rate that is going around the market and so may be easily ripped off. Hence, self-research is essential to prevent being ripped off.
- Know all the costs before you sign in for mortgage product
Along with self-research, when hiring a mortgage broker, make sure that you confirm all the costs beforehand. A mortgage broker looking to rip you will most likely add up several additional costs as you go along the way, which will, in the end, increase the total amount you were supposed to pay.
Although what was decided initially may seem cheap, make sure that you are well aware of any additional costs beforehand to ensure that you are not paying more than you wish to.
- Take a pre-approval for the mortgage
A precautionary measure that you can take to guarantee you are not ripped off and do not have to look elsewhere in terms of getting a loan is to get pre-approved for a mortgage.
Pre-approval is a confirmation that you will get the amount decided upon in due time. Once this happens, no broker will be able to take your application and have the chance to refuse while charging you an additional amount.
When you are pre-approved, you can confidently look towards buying a house or bid at an auction without worrying about the resultant outcome or having to pay any extra amount looking for refinancing.
How Mortgage Brokers Get Paid?
A mortgage broker earns a great deal annually, offering their services and confirming deals between lenders and borrowers.
They charge an outright finder’s fee, which is the commission they charge from the lender for finding them a borrower. This can be a one-time payment given upfront or also ongoing if the borrower comes back for refinance. The ongoing payment method is referred to as the trailer method.
Not only this, but the mortgage broker may also charge a commission fee from the borrower for finding them a suitable lender. Mortgage brokers offer their services to borrowers to ease the process and manage all the leg work and paperwork. For this particular reason, they may also charge the borrower for providing them with services.
Mortgage brokers can earn anywhere from $50000 up to $140,000 per year as per Payscale and Indeed’s research.
Do All Mortgage Brokers Charge a Fee?
From a borrower’s point of view, not all mortgage brokers charge a fee, but several may do so if your loan portfolio is complex. Since mortgage brokers provide you with a service, they have the right to charge you for what they provide. This is one method for them to earn their payment and income.
Coming onto the lenders that are in contact with a mortgage broker to find them a borrower, most mortgage brokers charge them a finder’s fee in terms of a commission rate based on a percentage of the total loan amount. This fee is for their contacts and expertise in terms of finding the ideal borrower.
Questions You Must Ask To Qualify a Mortgage Broker
Here is a list of questions you must ask your mortgage broker before sign-in to anything.
- What down payment should I make?
This question is a necessity to ask to confirm whether you will be able to afford the loan or not.
This will also guarantee you whether your loan is confirmed or not since the mortgage broker can only confirm a down payment once a lender is on board.
- How many lenders do you have on your panel?
You ensure that you are in contact with a reliable and trustworthy mortgage broker; asking about the number of lenders on their panel is an essential question. The more the number of lenders they are in contact with, the more trustworthy they will be, as it signifies how a greater number of people trust them.
Not only this but if a mortgage broker is in touch with more lenders, there is a chance for you to get the excellent loan offer you desire.
- What’s the interest rate?
Knowing the interest rate is an important part of getting a loan. You always pay back your loan with an added interest rate based on a pre-decided percentage. You can only determine whether you will be able to pay back the loan after you know the interest rate, so getting this clarified beforehand is important.
- What are the estimated closing costs?
Often mortgage brokers may put high closing costs and rip you off. To ensure that this is not the case, always be sure of all the closing costs that you will have to pay. This will guarantee that you are able to afford the loan and are not being ripped off by the mortgage broker in terms of showcasing the loan as attractive initially but being far more expensive in the long run.
- Is there a penalty for pre-payment of the loan?
Most of the time, borrowers are unaware of whether there is a penalty for pre-payment of the loan. Some lenders tend to put this penalty, and if the borrower ends up paying for the full loan earlier, they are charged an additional amount as a fee for early payment.
To avoid this extra cost of getting a loan, make sure you know whether there is a penalty or not for pre-payment.
Tip: remember, most of the personal-finance loans (e.g. car finance) attract a penalty for paying them early.
Are All Mortgage Brokers are Same For Real Estate Investors?
Mortgage brokers and real estate investors may have different jobs, but they are similar in various ways. One of the main similarities between both real estate investors and mortgage brokers is that both of these jobs require working on nights as well as weekends without any specific holiday.
Alongside this, a mortgage broker needed a license to be able to provide their services to the mass public. Although a mortgage broker can also become a real estate investor, the opposite is more likely not possible to a great extent.
As noted earlier, All Mortgage Brokers are not the same from the perspective of a real estate investor or developer. Mortgage brokers differ based on their trustworthiness, expertise, access to home loan products, effective communication and their charges.
Don’t expect to stick with only 1 mortgage broker for decades. Experienced real estate investors monitor the performance of mortgage brokers well. They do not hesitate to move on to a better performer mortgage broker.
What Are The Differences Between Mortgage Brokers And Real Estate Investors?
There are several differences between a mortgage broker and a real estate investor.
One of the core one’s being that real estate investors tend to connect investment properties’ with appropriate lenders (mortgages) whereas, mortgage brokers connect borrowers (i.e. property investors) to lenders to enable them to get a loan for the borrowers to be able to purchase a property and conduct a transaction.
Mortgage brokers aid transactions whereas, real estate investors conduct their business with or without mortgage brokers.
Another key variable between both of them is that real estate investors, due to trading in property, have comprehensive knowledge about the various types of properties’ available. While on the other hand, mortgage brokers have a great deal of knowledge of the available lenders and lender products, and are in touch with these lenders to help get funding.
What Are The Different Types Of Mortgage Brokers?
There are three different functioning mortgage brokers currently that work in the market.
1. Pure mortgage brokers
These are brokers who function simply like an intermediary. They connect lenders and borrowers, charge their own commission, and then their work is done.
2. Correspondent mortgage broker
These brokers take loans in their own name. They connect a lender with a borrower, but all the transactions that are conducted are done through their name, and so even on the legal paperwork, they are shown as the one’s borrowing the money decided.
3. Lending mortgage broker
A lending mortgage broker is someone who lends money out to borrowers from their own sources of finance.
They themselves act as lenders whenever they can while also connecting borrowers with other lenders if a greater amount of loan is required.
Having understood the constantly growing and evolving mortgage broker market, we can clearly state that all mortgage brokers are not the same for real estate investors. They are different and have different functions that are necessary as per the need of any individual or real estate investor.