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How Do Mortgage Brokers Get Paid?

how do mortgage brokers get paidHaving established a career and perhaps even begun a family, many people decide because of space limitations, location or just as a financial investment that home ownership is their next logical step in life. At this point a complicated process begins to find the right home and to finance that investment. One of the common questions I’m asked from new clients is “How do mortgage brokers get paid?

How Do Mortgage Brokers Get Paid?

You can use the services of a mortgage broker who serves as an independent mortgage facilitator who will work with many banks and direct lenders – dozens or more – not one particular source. In Canada, the lender pays mortgage brokers on contractual terms agreed upon between the lender and mortgage broker. You are not charged a “direct fee” for their services.

A good mortgage broker will assist in analyzing your financial situation including credit reports and will present your application in the most favorable light to those lenders the broker feels best fits your needs. If you are in agreement with a chosen lender’s terms, the mortgage broker works with the lender until closures of the loan. The broker then receives their fee from the lender.

Broker Fees

There is some debate about the fees paid to a broker and its effect on the ultimate loan cost to the borrower. Detractors say mortgage brokers are just middlemen that add another layer of fees to a loan’s total cost. Worse, they say mortgage brokers commissions or usually structured to provide an incentive for brokers to direct borrowers toward more costly loans and lenders.

In addressing the issue of fees, mortgage broker associations point out that brokers do most of the work involved in the processing of the borrower’s loan and do not necessarily add to the total cost of the loan beyond the origination fees usually charged by a bank.

In fact, it is argued that many banks work closely with mortgage brokers because brokers boost their mortgage volume without the expense of adding bank branches and additional mortgage representatives. These cost savings can decrease the expenses they need to collect in closing fees. In essence, the broker’s fee is a substitute for part of the approval fees.

However, the borrower should be aware that the lender’s payment to a broker could be a flat “finder’s” fee or a percentage of the mortgage value paid as a commission. Additionally, this commission may be based on the size of the loan that includes the term of the loan – a longer term equals a higher commission. Finally, not all lenders pay the same fee for the same loan. This can influence which lender the broker recommends.

Be An Educated Consumer

How your mortgage broker is paid is something you should be aware of and even concerned about. Do not hesitate to question your broker about the banks and lenders they contact and to explain clearly the options available to you before and after the broker’s recommendation.

Probably your best plan before approaching a mortgage broker or before accepting a loan proposal is to become knowledgeable about prevalent interest rates and fees. Most importantly, do not immediately disclose the interest rate or monthly payment you are willing to accept. Let the broker indicate what terms they can secure.

Incentive systems do exist; however, mortgage providers who wish for your future business and referrals to your family, friends and colleagues know that one large commission at the expense of future business is counterproductive.

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