Mortgage Brokers Fees Demystified
In this article we will clarify the misconception regarding fees being charged when using the services of a mortgage broker.
- Is it true that most residential mortgages arranged by a mortgage broker are NOT subject to lender or brokerage fees?
- TRUE - Where an applicant(s) can be approved for financing with a qualifying income, satisfactory credit history and net worth, there are NO lender or brokerage fees charged. To find out if you qualify, your mortgage broker will first add your mortgage payment together with one twelfth of annual property tax. Heat and hydro payments and one half of monthly strata fees (if applicable), the total of which cannot exceed 32% of your combined household income. Your Mortgage broker will then determine if your monthly payments on other forms of financing (car loans, Credit and department store cards etc.) combined with the aforementioned, is equal to or less than 40% of your total household income. These thresholds are referred to as "debt service ratios".
- If I don't have a picture perfect financial situation, are there still alternatives available?
- YES - Flexible mortgage products are available, almost exclusively through mortgage brokers, to meet the demands of borrowers whose financial circumstances may be slightly outside of traditional lender guidelines. These circumstances include borrowers who may have a slightly higher debt service ratio, a less than perfect credit history (e.g. discharged bankruptcy or paid collections etc.) or an inability to confirm income due to recent self-employment. However, the special products available to borrowers, even with their flexibility, are approved in part, on the reasonableness of the applicant's handling of previous financial affairs. As no two borrowers are the same, applications are processed on a case by case basis. Additionally, with this type of financing, lender and/or broker fees may apply depending on the applicant's individual circumstances.
- If I am self-employed, is it true that I may NOT be subject to lender or brokerage fees?
- TRUE - Many self-employed individuals feel they will be subject to lender and/or broker fees by virtue of their source of income. The guidelines for mortgage qualification (32%and 40% debt service ratios) for self-employed individuals are the same as for an applicant who is an employee except for one difference, annual income. A self-employed individual will be qualified based on the average of two years "NET" taxable income (three years, if the mortgage is high ratio i.e. greater than 75% of the purchase price or appraised value), not the gross revenue of the self-employed business.
- What type of financial situation would justify a fee-oriented transaction?
- An applicant who has:
- An excellent credit history but no ability to confirm income;
- A circumstance where the new mortgage together with any existing first mortgage is greater than 65% of the value of the property;
- Less than satisfactory income, however, has managed to re-establish credit in the last year or two;
- An unsatisfactory credit history, however, all previous debts have been repaid;
- Been discharged from bankruptcy one year or greater where the reason for the bankruptcy was appropriate.
- If fees are charged, are they paid in advance, i.e. "up front fees"?
- Lender and broker fees are generally deducted from the proceeds of the mortgage. A borrower may be required to pay a portion of the fee structure in advance, which is sometimes referred to as a commitment fee. If there is a fee charged in advance, ask if the fee (or portion thereof) is refundable if your mortgage application is not approved. Policies will vary from firm to firm. Where lender or broker fees are charged, you will be provided with a borrower disclosure statement that will clearly identify the lender and/or brokerage fees being charged in addition to estimated survey, appraisal and legal fees. Furthermore, the impact of the lender/broker fees over the term of the mortgage will be disclosed as an "effective annual rate of interest" (i.e. the rate of interest compounded one time per year). Ask your mortgage broker to explain this and other borrower rights under this form.