As property values cool down, the market is turning in favor of buyers. But how do you get approved for a mortgage?
In North America, property is mostly bought on credit, which is called a mortgage. Banks, lending companies, or agencies provide this money to buyers with the help of mortgage brokers.
If you’ve ever bought a property or have used the services of a mortgage broker, you may have noticed they didn’t invoice you.
But then how do mortgage brokers get paid?
Well, let’s find out!
Mortgage brokers are qualified real estate professionals that work behind the scenes with a variety of lenders to provide you with the best mortgage interest rate. Banks, which are also lenders, are accessible through a mortgage agent who has more experience than a clerk at a branch. But mortgage brokers are not limited to one financial institution. They can access several creditors for a mortgage.
When a broker takes you on as a client, they will gather your financial information and bring you the best available options for your needs.
This saves you the hassle of going from one lender to another. It also takes dealing with a bunch of complicated paperwork and numbers off your plate or booking to speak to a banker who may not have the authority to give you advice on issues or how to get approved on your scenario.
Not only do brokers take on those duties, but they also do all the work for the lender. In return, they get great deals and discounts that can work out well for you — and for them. They have automated processes to allow you to upload documents to a client portal to ensure a smooth review of documents for approval.
Brokers can also provide great options for newcomers to Canada because they can help negotiate a loan by helping the lender look past the lack of credit history. They also have the magic beans for those that suffer from poor credit. Mortgage brokers can also help those that have high debt and are considered risky borrowers. And another category of borrowers that benefits from brokers is self-employed people who may not qualify with big banks.
So how do mortgage brokers make money?
One word: commission but the lenders pay based on having a client for a term.
And just like any other commission-based job, the more deals brokers close the more they get paid. And of course, lenders incentivize brokers to find the best borrowers that can service a loan. They get better rates based on this volume and pass it along to their clients. Using an experienced agent who has this access is key.
But professional brokers won’t let the pressure of their commission get in the way of finding the best deal for you. They also must protect their reputation, which is directly related to how many deals they will get from lenders. Go with an agent that shows they have experience and tenure.
Brokers also rely on referrals from previous clients so they can get more business. And they want to make sure they provide high-quality services, so the same client comes back when it’s time for mortgage renewal.
The most common way mortgage brokers get paid is through what’s called a finder’s fee, which is determined by the lender. As with all commission-based payments, brokers are paid after the deal has gone through. This means it’s in their best interest to keep their client happy, so the process goes smoothly.
The amount of a finder’s fee could range depending on your term and based on your mortgage amount. However, the exact percentage the broker makes will also depend on the type of chosen mortgage and the length of your mortgage term.
Now what’s this all about?
A mortgage broker is affiliated with a licensed brokerage that allows them to use its name and its reputation. The split fee is the percentage the brokerage shaves off the commission as a licensing fee.
This amount can depend on the experience of the broker. The more experienced the broker, the less the split.
Finding a mortgage is hard work. Brokers must go from one lender to another and prepare a winning case for you. This takes time, great negotiation skills, experience in the industry, and connections that the broker can leverage for the best results.
To make the task worth their time, brokers will rank their clients by their level of debt serviceability. Some clients are marked as “prime clients,” who have the income and habits to consistently pay off a debt. These are the types of clients all brokers and lenders prefer to offer competitive rates.
However, if your case falls below the prime client level, be prepared to pay your broker a percentage fee as they are usually deals that require a lender fee and do not pay a broker much commission.
But don’t worry, none of this will come out of the blue. Mortgage brokers, by law, are required to disclose borrower fees upfront. If there is an issue qualifying on income or credit, you will hear about it early. If you end up having to pay, you can decide on a percentage and add it to a contract.
Speaking of which, when your mortgage is up for renewal, it’s a good idea to go back to the same broker that helped you initially. Give them a heads-up 4 months before the renewal date so they can start their search.
They already know your case. They have the paperwork from the initial file. They can access your record and build a case with the same lender for a better deal. Or they can present you as a prime client to another lender that may offer a lower rate.
If you decide to switch, your broker will still get paid, but it’ll be a new one-time commission or negotiated trailer fee. In most cases, our goal is to improve on the renewal offer issued by the existing lender
It’s always a good idea to have the “fee” discussion with your broker upfront. They’re obligated to disclose any fees to you.
It’s fair compensation for work that goes into the whole process.
The broker puts massive effort into fine-tuning a deal. The complicated numbers and paperwork they bury themselves in are specialized and hard work. The number of hours and behind-the-scenes prep that goes into a mortgage never come to light because professional and seasoned mortgage brokers take good care of their clients.
And this is just the lighter side of things. If your case is complicated, even more work goes into it.
Lenders determine how much of a special discount they can provide brokers by assessing them for their efficiency and consistency with clients. Cancellations will not only affect broker ratings but future referrals and the special deals they can secure for their clients.
If brokers fall way below the cutoff point set by a lender, they may risk losing their standing with a lender altogether.
Whichever one it is, read the fine print carefully and have an open discussion with your broker about this before you sign any papers.
You have to remember that mortgage brokers are part of your real estate team. They’re working for you to find the best deal in town so you can become a proud homeowner
