How Do Mortgage Brokers Get Paid?
REVIEWED BY JAMES GHEEN | PUBLISHED ON AUG 29, 2019 | 8 MIN READ
Mortgage brokers are known to make quite a bit of money when they can satisfy their clients. The best part of this job is that mortgage brokers are independent. This means that they control their time and earnings. If you know a lot about real estate and want to build a career in this domain, then you probably are on your way to becoming one.
Are you interested to become a mortgage broker and earn high broker fees? You may be asking yourself “how do mortgage brokers get paid?”
In this article we will cover the following topics:
If you know how they get paid for their competitive mortgage services, you’ll be equipped with the knowledge on how to charge mortgage rates. Now let’s get started and answer the big question: “how do mortgage brokers get paid?”
What do Mortgage Brokers Do?
If you’re not familiar with how mortgage brokers work, let’s look at their job description first. In a nutshell, they are the people who bridge the gap between the mortgage lenders and potential customers. They’re middlemen who facilitate the transactions of the mortgage loan between the mortgage borrower and lender so that the borrower may get a house.
Why Use a Mortgage Broker?
Right now, some of you may think that there is no reason to go through a mortgage broker if you can just go to the lender directly and get a quote for the loan amount. Well, this may be true, but most people prefer to use mortgage brokers because they know how to navigate the market of home loans. They can make things easier for you by eliminating the need to study about home financing. Just to give you an idea of the demand of mortgage brokers, KPMG released in their journal “Transforming the Mortgage Broker Experience” stating that a total of two-thirds of mortgage loan applications were handled by mortgage brokers.
Take note that most people don’t have the time to look for lenders and determine which ones are the best. They also don’t have the time to go through all the different types of mortgage deals that lenders may offer. Brokers offer ease and certainty because they know which lenders are good to transact with.
In a sense, working with a mortgage broker is practically easier than going directly to the lender.
How Are Mortgage Brokers Different from Loan Officers?
Some people may confuse a mortgage broker with a bank loan officer. However, it’s vital to know the differences between the two because they are highly different in terms of the way they work and the way they get paid.
First, loan officers are connected to the banks. They follow the bank processes, work under the policies laid out to the banks, and service the bank’s customers. With that kind of boxed environment, they are rather limited in their ability to serve the customer. Also, they get paid based on the salary or commission policy of the bank. They only control how much they earn to a certain extent.
A mortgage broker, on the other hand, determines how much he or she earns in broker fees based on the mortgage rates of his or her proposed loan option. Aside from the freedom to determine the fees for services, he or she also carries the ability to freely use whatever methods he or she deems necessary to get a good deal for the client. This also means that the broker has the power to try and waive some of the administrative fees put out by the lender. They can also control yield spread premiums that occur due to higher interest rates.
What is the Process at Which Brokers Secured Loans?
Your mortgage broker will get all the necessary details of your desired loan from you. From there, the broker will speak with some lenders who may want to take up the loan. After that, the broker will draft up a good faith estimate. The good faith estimate will list some of the offers and compare the terms of each option. These options are given to the client for approval. Once the client approves of her or his desired option, then the transactions can begin. At that point, the broker will continue to facilitate the transactions between two parties until the borrower pays off the entire loan amount.
How do Mortgage Brokers Get Paid?
We already established that a broker gets paid through a broker fee that he or she charges a client for the services that he or she provides. What are the specifics about the payment? Do they charge fixed rates or a percentage? Let’s find out below.
First, let’s talk about how brokers charge their clients. They usually charge clients a percentage of the loan amount. The standard range that brokers charge for their services is around 1% to 2%. Some brokers may charge up to 3%. This usually depends on how good the broker is.
Of course, these aren’t the only fees that the broker usually charges. There may also be a few other fees as well, such as transaction fees, processing fees, and other fees. Some people may be worried that since brokers are not connected to banks, there might be hidden fees.
Fortunately, though, most countries have laws wherein brokers are not allowed to abuse their clients. That said, brokers are supposed to list down all the fees in an itemized breakdown so that the customers will know each cost and why there is such a cost. The extra fees are dependent on how big the loan is and other factors.
If you’re a broker, it will be pretty much like you’re owning a business or doing consultancy work. You must make sure that you close the loan sale before you can get paid. If ever the loan terms that came from the broker is declined by the lender, then the broker must look for another lender so that he or she can receive the broker fee.
When do the brokers get paid and what terms do, they follow? First, the broker fee may be deducted from the loan itself. When the borrower gets the money, it will already be minus the 1% or 2% broker fee. The lender pays for the broker fee. The broker may also ask for the percentage upfront from the borrower. In this case, the borrower must pay at the start once the borrower and the broker already agree on the loan amount and the terms to get the house loan.
What is a Trailing Commission?
Aside from the upfront broker commission that brokers receive from the mortgage payment, there is also another way for brokers to earn. This is known as the trailing commission. In essence, this trailing commission is known as a sort of advisor fee that is regularly given to the broker as long as the mortgage is still being paid. The trailing commissions may range from 0.18% to 0.25% per year. The amount also depends on the skill of the broker among other factors.
Take note that there are some states or countries that have already banned big trailing commissions as well as an extremely big upfront commission or broker fee. This is to ensure that the brokers will continue to have the best interests of the customer at heart. Of course, there are still many ways for brokers to make money aside from trailing commissions. Depending on where you’re from, you may or may not be allowed to charge trailing commissions.
How do You Become a Mortgage Broker?
Before we end this article, we’d like to remind you that you need to have certain educational credentials before you can get into this field. First, you must be at least a high school graduate. Second, you must have two years’ experience in any position of a licensed brokerage. Lastly, you need to apply for a license.
Those are some of the things that you need to take note of if you want to know how mortgage brokers get paid. If you study how do mortgage brokers get paid and how much brokers may make, then you’ll know just how profitable being a mortgage broker is. Mortgage brokers make a lot of money even if they don’t charge those trailing commissions.
You can just imagine how much 2% of $300,000 is. 2% of $300,000 is $6,000. As a broker, you can receive a total commission or fee of $6,000 just by facilitating a loan between a lender and a borrower. And that’s just one client. The beauty of being a mortgage broker is that you can have as many clients as you want. If you have some good connections with lenders or if you’re resourceful, you can make a ton of cash in this field. One thing you must do is study how mortgage loans works, get yourself a mortgage broker’s license and improve your people skills. If you know all of that and how brokers make money, you’re good to go.
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