Choosing the Right Mortgage Broker
What’s more intimate than a hug from grandma? A mortgage broker who knows your finances inside out.
Sales have reached an all-time high compared to year-over-year for Edmonton real estate. With all these sales, buyers will want to find a lender who can get them the lowest rate possible.
That’s where a mortgage broker comes in. These licensed individuals act as the middleman between you and several lending institutions, finding you the best deals.
Some buyers have limited connections, and banks can only offer so much. An experienced broker could be the one thing saving you thousands of dollars. To pick the right one for you, we need to look at the different types.
Types of Mortgage Lenders
Direct lenders tend to be a variety of banks or credit unions that can provide a mortgage to borrowers. Each bank offers different rates and terms. Loan officers work with their clientele from applications to closing. Since the officer is familiar with their client, borrowers get personalized answers.
Mortgage brokers have access to a large network of lenders in Canada, including the major banks: RBC, TD, Scotiabank, BMO, CIBC, and National Bank. They also have access to smaller lenders like First National, MCAP, and Equitable Bank.
Brokers assist in several processes, including mortgage pre-approval and mortgage application. First-time homebuyers gain useful knowledge since brokers explain terms, conditions, risks, and features.
They can reach out to several lenders to find a rate that works for you. Brokers generally charge a 0.8% to 1% commission for a 5-year fixed mortgage.
Correspondent lenders work directly with the borrowers. They’re the initial lender and sometimes service the loan. They’ll collect a fee from the loan once it closes and sells the loan to an investor on the secondary market.
A benefit is access to a variety of loan products. But once it’s sold, borrowers don’t find out who manages their mortgage until after the sale.
Mortgages have two channels: wholesale and retail. Retail loans are financial institutions. They deal with borrowers directly and conduct loans in-house.
Wholesale lenders don’t detail borrowers directly. Rather, they offer loans at a discounted rate through third parties. Then the broker or bank needs to find a borrower to pair with the discounted rate. Wholesalers provide favourable loans, but you’ve to go through a third party to find them.
When you apply for a portfolio loan, lenders issue and keep mortgages instead of selling to a secondary market. Since it’s kept in-house, lenders generally offer flexible terms.
Portfolio loans are easier to qualify for than other loan types. But it comes with higher interest rates, prepayment penalties, and inconvenient repayment schedules.
Hard Money Lenders
Hard money lenders are private investors or companies who directly deal with the borrower. While other lenders check your ability to repay loans, hard money lenders decide based on your property’s value.
Since they’re private, they’re free to make rates and conditions at their discretion. Their rates are often short-term, usually a few years.
The checking process is less rigorous and quicker than traditional loans. Borrowers should be careful of the risk that comes with these loans, though. Hard money lenders demand higher interest rates in exchange for a large lump sum within a short time.
How to Choose a Mortgage Broker in 6 Steps
Now that you know about the different types, it’s time to find the one that works best for you. Here are six steps to find the best one.
1. Strengthen Your Credit
Before applying, check the health of your finances. The best way is to check your credit score and credit reports. Canada’s two main credit bureaus are Equifax and TransUnion. A credit score ranges between 300 and 900.
According to Equifax, this is the rule of thumb for all credit scores:
- 760 and higher are excellent
- 725 to 759 are very good
- 660 to 724 are good
Lenders see 660 are higher as lower-risk. Anything below 660 is less likely to qualify for better loan terms. 560 and under are generally “poor” scores. It makes securing better loans difficult.
Improve your score by paying your bills on time, don’t overspend, and checking credit reports. Aside from credit, lenders will also check your ability to handle a debt-to-credit (utilization) ratio. It reveals what your debt compared to your credit limit will look like. The Government of Canada recommends a ratio of 35% or lower.
2. Set a Budget
A budget will help determine how much mortgage you can carry. Lenders preapprove you by judging your gross income and outstanding debt. However, they don’t take into account monthly expenses, utilities, or insurance.
Review your expenses, goals, and expenses for an accurate idea of your budget.
3. Weigh Your Mortgage Options
Before you speak to a mortgage lender, study the five types: open, closed, convertible, hybrid, and reverse mortgages. Each mortgage type comes with its own set of pros and cons.
Some come with a fixed rate, while others offer variable rates. For example, open mortgages have the option to pay off an entire mortgage before the term is complete. Closed mortgages operate at a predetermined rate. You get penalized if the mortgage is paid off before the term is done.
With that in mind, you’ll need to see which one works best for you. Also, if you offer less than a 20% down payment on a home, you’re required to buy mortgage loan insurance.
4. Compare Offers From Each Lender
Whether you look at credit unions or banks, they all offer different rates, fees, and terms.
WOWA and Ratehub have a list of their top picks based on 5-year fixed rates and variable rates in Canada.
Set up appointments with your top choices for more information and see if it works for you.
5. Get Pre-Approval
Don’t be afraid to shop around for the best mortgage rates. Just as each bank offers varying rates, each broker has different connections. Get pre-approval from three of four lenders to get accurate loan pricing.
When you apply for a pre-approval, lenders will ask for documentation including:
- Some form of government-issued ID
- State of bank accounts, including remaining debts
- Outstanding debt not limited to child support, car payments, and personal loans
- Confirmation of Down Payment
- Your current property includes mortgage statements, homeowner insurance, recent property tax bill, legal description of the property, and property value
- Proof of employment
You can find the complete list on the Government of Canada’s site. Once you receive a pre-approval, lenders can still check your history at any time. If you apply for a new line of credit or take out a large loan, it will change the state of your pre-approval.
6. Read the Fine Print. Always.
No one enjoys having a massive wall of text shoved in front of their face. It’d be nice if we could just hit ‘Accept’ and move on with our lives. When it comes to mortgage contracts, always read the fine print to avoid buyer’s remorse.
Ensure the interest rate, monthly payments, and other fees are what you agreed upon. Ask if all the closing costs are also finalized.
Questions to Ask a Potential Mortgage Broker
Asking your potential mortgage broker questions helps you understand the process better. It’s also a useful way of assessing if you’ll get along with them. Throughout your search, ask these crucial questions:
- Which lenders did you choose for my financial situation, and why do you think they are the best?
- What fees do you charge for your services?
- What are my closing costs?
- Will you be my main contact for the entire process? Who takes over the underwriting process?
- Is there a penalty for breaking my mortgage?
- How will I be updated on my loan’s progress? How often?
The Best For You
Don’t be afraid to keep your options open when you search for the right mortgage broker. Each one offers something different, but you’ll need the one that works for your financial situation. Before meeting with brokers, research the basics of mortgages to get better acquainted. In your move to Edmonton, remember these tips when choosing the right broker:
- There are six types of lenders available, all with varying loan rates, terms, and interest.
- Check your credit score–anything higher than 660 increases your chances for a loan.
- Figure out your budget by pre-determining gross income, outstanding debt, and monthly expenses.
- Read up on the different mortgage options available and discuss which one works for you.
- Review the offers your broker suggests and ask how they came to that conclusion.
- Ask several lenders for pre-approval. Looking at the numbers gives you a general idea of how much you can carry,
- Always read the fine print in any contract to see if everything is in order.
It’s a tough decision to make, but don’t fret; I know some great professionals who can offer valuable insights. To get in touch, contact me, and we’ll set something up!