When looking to purchase a new home or refinance your existing mortgage, you may consider working with a mortgage broker to help you find the best loan options. But how exactly do mortgage brokers get paid?

Mortgage brokers are paid through borrower-paid compensation, lender-paid compensation, or dual compensation. In borrower-paid compensation, the borrower pays a fee directly to the broker. In lender-paid compensation, the lender pays a commission to the broker. Dual compensation involves both the borrower and lender paying the broker. The specific model used varies based on agreement and circumstances.

Mortgage brokers act as intermediaries between borrowers and lenders. They can offer their clients access to a broad range of mortgage products from multiple lenders. A key question for any borrower is: who actually pays the mortgage broker? 

How Does a Mortgage Broker Get Paid?

There are several common compensation models for mortgage brokers to get paid.

1. Borrower-Paid Compensation

In this model, the borrower directly pays the mortgage broker a fee for their services. This commission is typically 1-2% of the total loan amount. 

The borrower has the option to pay this fee upfront when they apply or have it rolled into the loan amount. Paying the fee upfront reduces the amount you need to borrow. 

Mortgage brokers who work on borrower-paid compensation have a fiduciary duty to act in their client’s best interest. They are obligated to find the most favorable rates and terms.

2. Lender-Paid Compensation

Here, the lender pays the broker a commission for originating the loan. The lender will build this commission into the interest rate and fees charged on the mortgage.

Lender-paid commissions can range from 0.5% to 2% of the loan amount. This allows the broker to advertise their services as “free” to borrowers.

3. Dual Compensation

Some brokers receive compensation from both the borrower and lender. This could involve an upfront fee paid by the borrower and a commission from the lender.

Dual compensation structures can create conflicts of interest for the broker, as they earn more by placing the borrower into a more expensive loan.

What Are the Advantages of Using a Mortgage Broker?

There are several potential benefits to hiring a broker:

Access to a wide variety of loan programs and lenders – Brokers can offer lots of options beyond what your local bank may carry.

Expertise – An experienced broker understands the complex mortgage process and marketplace. They can advise you on programs and terms. 

Efficiency – A good broker handles all the paperwork, communication with lenders, rate shopping, etc. This saves the borrower time.

Customized options – Brokers can help you find a specialized program that matches your needs, financials, and goals. 

Lower rates – In some cases, brokers may have access to wholesale lender rates below what you could get directly.

What Are the Disadvantages of Using a Mortgage Broker?

However, there are also some potential downsides:

Added fees – Even with lender-paid compensation, borrowers can end up paying higher rates and points.

Not a one-stop-shop – Mortgage brokers do not provide end-to-end origination and servicing. You still deal directly with the lender.

Lack of fiduciary duty – In certain compensation models, the broker’sfinancial incentives may not align with getting you the optimal loan.

Delays – Adding an intermediary can slow down the application process in some cases.

Higher costs – On some loan types, brokers’ pricing is not as competitive as direct lender rates. 

How Much Do Mortgage Brokers Charge?

Typical mortgage broker fees fall into the following ranges:

The total compensation received by the broker will vary based on your selected loan program, your credit profile, desired loan amount, and market conditions.

Is It Cheaper to Go Directly to the Bank or Use a Mortgage Broker?

There is no universal answer here – it depends on your specific situation. Here are some factors to consider:

• Mortgage brokers can offer access to wholesale lender rates that direct retail lenders may not be able to match. This can result in lower overall fees and interest rates.
• However, on conventional conforming loan amounts, direct lender pricing is very competitive and can sometimes beat broker rates.
• Brokers have more flexibility to shop for the best pricing across multiple investor channels. This can provide pricing advantages on jumbo, specialty, or non-QM loans.
• Any borrower-paid broker fees need to be weighed against potential savings achieved via lower rates.
• Ask potential brokers for a complete estimate showing all origination fees, discount points, and projected interest rate savings to compare options.

How to Choose a Good Mortgage Broker?

Here are some tips for selecting the right mortgage broker for your needs:

• Look for an experienced broker who has been in business for 5+ years. 
• Verify they are properly licensed in your state. 
• Ask for referrals from recent clients and read online reviews.
• Understand how they are compensated and who pays their fees.
• Ask them to explain their mortgage process and expected timelines.
• Get rate and fee estimates in writing early in the process.
• Choose a broker who answers questions clearly and transparently. 
• Make sure you have a good rapport – you’ll be working closely together.

What Questions Should You Ask Your Mortgage Broker?

Here are some key questions to ask upfront:

• What types of loans do you typically recommend and why?
• What lenders will you be obtaining quotes from and why did you select them? 
• How will you be paid on my transaction – by me, the lender, or both?
• What are your rates and fees for my loan amount, credit profile, and loan type? 
• Are there any charges or fees not included in the initial Loan Estimate?
• What is your average timeline for completing the mortgage process?

Can You Negotiate with Your Mortgage Broker?

Yes, you may be able to negotiate certain fees and terms with your prospective mortgage broker. Any borrower-paid fees are open to negotiation – you can ask them to reduce their commission percentage to earn your business. You may also ask if they can waive or reduce any third-party fees like appraisal or processing fees to lower your costs.

Another option is to see if they can make discount points or origination fees tax deductible by converting them. Some borrowers have success asking the broker to cover ancillary charges like title insurance or to provide a rate lock guarantee in case rates fall during the process.

Beyond fees, you can also negotiate timelines, communication expectations, and customer service elements with your broker. Set clear expectations upfront about how quickly the broker will respond to inquiries and provide status updates. Look for a broker willing to customize their typical process based on your needs and preferences.

With an experienced broker, much of the relationship is open to negotiation – so don’t be afraid to ask questions and advocate for the services and fees that fit your budget and priorities.

When Should You Pay the Mortgage Broker Fee?

For borrower-paid fees, you typically have two options:

1. Pay upfront when you apply – This reduces your loan balance. But the fee is usually non-refundable if you don’t proceed.
2. Pay at closing – The fee gets rolled into your overall loan amount. But you preserve capital until the transaction completes.

Most borrowers choose to pay any broker fees at closing. But paying upfront can make sense if you are highly confident you will close and want to lower your principal.

Are There Any Hidden Costs in Hiring a Mortgage Broker?

A few things to look out for:

Above-market rates – A broker may quote you a higher rate than you could get directly from a lender. This indirectly compensates them via a larger lender commission.

Junk fees – Look out for unreasonable admin fees, doc prep fees, underwriting fees, etc. that are just going into the broker’s pocket.

Inflated third party fees – Some brokers mark up appraisal, title, or credit report fees and pocket the difference.

Mandatory services – Your broker shouldn’t force you to buy their in-house title or escrow services.

Prepayment penalties – Shady brokers may steer you into loans with penalties that trap you.

A good broker will be completely transparent about their fees and explain all charges. Ask questions if you see anything suspicious pop up in your Loan Estimate.

Conclusion

While most mortgage brokers provide valuable services to borrowers, it is important to understand how broker compensation works and the potential conflicts involved. Asking lots of questions upfront will ensure your broker consistently acts in your best interest throughout the mortgage process.

Frequently Asked Questions(FAQ)