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Adil is about to close on a home purchase and is surprised that his mortgage broker is asking for a cash payment for the broker fee before the funds are advanced.
Q. Is it typical to pay a mortgage broker fee in advance, and before closing?
My broker is saying that I have to pay cash one week before closing, and that he will pay other persons who are involved. I am confused as to why brokers payment in advance and in cash.
–Adil
A. A mortgage broker can obtain financing for a borrower to buy real estate from different sources. They can try to arrange the best deal, beyond just the interest rate, with banks, credit unions, trust companies and other lenders. By comparison, a mortgage specialist at a bank or similar financial institution may only be able to arrange a mortgage loan from that single institution.
Different provinces have different rules related to education and licensing requirements for brokers; beware there are also private lenders who are not subject to the same regulation.
A mortgage specialist at a bank, credit union or trust company may be paid a salary, bonus, or commissions for arranging mortgages. Most or all of their compensation tends to come from the volume of mortgages they facilitate.
Meanwhile, a mortgage broker generally gets paid a commission or finder’s fee from the lender for arranging a mortgage. A lender’s commission depends on the size of the mortgage, the length of the term and other factors. The commission may be paid upfront or it may be paid over the term of the mortgage, as a trailer fee, or it may be paid in some combination. The fee may range from 0.5% to 1% of the mortgage, but could be lower or higher.
Some brokers may charge a broker fee to the borrower in addition to the commission they are paid from the lender. A broker fee is more common if the mortgage application is a complicated or difficult one.
Ideally, borrowers should clarify right from the start what fees may apply, and a professional mortgage broker should lay out their compensation and all conditions for you. You’ll want to suss out if there are conflicts of interest that lead mortgage brokers to send more of their business to a certain lender because of incentives that lender offers to the broker. This could mean they are not shopping around for the best deal for their borrower. Mind you, a mortgage specialist at a bank that only offers their bank’s mortgages is not shopping around, either.
I think my biggest concerns for you, Adil, are the conditions of the broker fee. The requested payment in advance of closing puts you in a difficult position. I can imagine you might be concerned about not paying up, and as a result not receiving the financing you need to close on the purchase. This would be an unlikely and unfair outcome but could depend on your contract and the lender (is it a financial institution or is it a private individual?). I would check out the terms of your mortgage agreement, as you may not be under an obligation to pay the broker fee in advance.
The cash payment is suspicious. Typically, the reason someone asks for a cash payment is because they want to keep a transaction below the radar. There is no direct liability for a consumer who pays for goods and services with cash instead of another method, but there are indirect costs. The goal of the cash payment may be so the recipient can avoid taxes—and that indirectly costs all taxpayers. Another potential cost to a consumer is that it may be more difficult to document a cash transaction should they ever need a paper trail.
When buying a home, the earlier you can secure an approval for your financing, the better. Try to work with a regulated professional, like someone who has the Accredited Mortgage Professional (AMP) designation. Most importantly, ask questions about compensation, costs and other conditions so you know well ahead of time what to expect when you are securing financing.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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