There are many reasons home buyers opt to work with a mortgage broker. A broker acts as an intermediary between you and the lender, helping you navigate loan documents, get the best mortgage, and quickly close on your new home. Some homeowners, however, will choose to do their own loan research and work directly with the lender’s loan officer. Either option requires some thoughtful research. Your mortgage broker or lender will be in charge of one of the biggest purchases of your adult life.
Whether you work with a mortgage broker or directly with a loan officer, we recommend asking these three questions to help you choose the right option for you.
The Difference Between a Mortgage Broker and Loan Officer
Before we dive into our three questions, let’s quickly unpack the different roles related to your mortgage loan.
As mentioned above, a mortgage broker serves as an intermediary between you and the company lending you money. Brokers help borrowers find the best terms for their loans (lower interest rates, repayment periods, and options). They also process the paperwork between the borrower and lender and make sure the loan application goes smoothly.
Direct lenders, on the other hand, underwrite and fund the loans themselves. While a loan officer at a direct lender can still help borrowers navigate finding the right loan type, they are working within the restrictions of their company—not providing you with alternate loans from different companies. You, as the borrower, are responsible for researching different loan types, interest rates, and lenders, and then choosing the one that feels right for you. The loan officer for that company will walk you through the rest of the process.
Just like working with a real estate agent, hiring a broker allows you to depend on their expertise to find the right loan for your home purchase. But regardless of how you choose to proceed with your mortgage loan, there is some key information to glean from your mortgage broker or loan officer.
Questions to Ask Your Mortgage Broker or Loan Officer
1. What type of loan is right for me?
Before you decide to work with a mortgage broker or direct lender’s loan officer, gain some insight into their expertise as well as how well they pay attention to your needs. There are many different types of mortgage loans, and each one caters to different life situations.
Your mortgage broker or loan officer should ask careful, clarifying questions about your financial situation, employment, and credit history—as well as your goals—in order to determine which loan type is right for you.
When loan officers or mortgage brokers just start listing off loan types without trying to understand your unique situation, that could be an indicator that they are more interested in closing a deal than helping you with your investment.
The different loan types that are worth asking about include:
VA Loans: Backed by the Department of Veterans Affairs, these loans are for retired or active service members, as well as surviving spouses. VA loans often come with lower interest rates and more flexibility with regard to down payments. They do, however, have different fees and requirements attached to them, so it is important to discuss this thoroughly with your broker.
FHA Loans: These loans are backed by the Federal Housing Administration and can be a useful option when dealing with a low credit score or income restrictions. While FHA loans do help to make housing available where it previously felt out of reach, they do also have other requirements, such as private mortgage insurance.
Fixed-Rate Mortgage: The conventional fixed-rate mortgage most often ranges between 15 and 30 years for repayment. Whatever your repayment term, the interest rate stays the same the entire time. This is the most common loan type, but it is helpful to note that the longer your repayment term, typically the higher your interest rate.
Adjustable-Rate Mortgage (ARM): This loan type fluctuates depending on the market and current interest rates. As rates go up, so does your mortgage payment, and vice versa. There are limits on how much your loan can fluctuate, so be sure to ask your loan officer or broker what the cap is if you opt for an ARM.
2. Can you provide a breakdown of varying down payments?
This question requires some transparency from your mortgage broker or lender’s loan officer. Once your key financial metrics like loan to value and debt to income ratio are determined, ask for a clear breakdown of the closing costs for each different loan type. Closing costs due vary based on loan type and interest rate.
You can also ask for a breakdown based on varying your down payment. Say you want to keep some of your money aside for potential upgrades and fixes in your new home, ask your mortgage broker to help you understand what your mortgage payments and closing costs would look like if you lowered or raised your down payment.
Encourage your loan officer or mortgage broker to be very clear in their estimations for each loan type. Transparency and trust are both important factors when choosing who to work with.
3. How are you paid?
To better understand how much you will be paying for your new home, you need to be aware of all costs, hidden and apparent. Mortgage brokers are either paid through the lender or you the borrower. They typically make about 1% to 2% of the loan amount. The fees for a mortgage broker can show up in one of two ways: fees that you pay out of your pocket at closing or they are already rolled into the loan amount which would lower the amount you need for closing. The other benefit of a mortgage broker is that they are able to negotiate credits tied to each interest rate to help offset the closing costs. So be sure to get a clear understanding of the interest rate as well as the rate cost or credit.
Lenders’ loan officers, on the other hand, are paid a commission, usually through their lending company. That commission is also around 1% of the loan amount, but there is a catch. Whether it is charged on the front end through closing costs or paid on the back end after the loan is financed, the commission still comes from the same place: the interest rate on your loan. While it may not sound any different than paying for a mortgage broker, the difference is in representation.
Understanding the breakdown of fees, how a mortgage broker or lender loan officer’s commission impacts your bottom line will help you better choose the mortgage support that is right for you.
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3 Questions You Should Ask a Mortgage Broker or Direct Lender When Choosing One to Work With is written by LemonBrew, A Financial Gym Partner for financialgym.com