Private Mortgages – Fees

One of the unfortunate things about private mortgages is the brokerage fee. If you have never dealt with a non-bank lender before – a brokerage fee is an amount charged by the mortgage broker, to compensate themselves and the brokerage. The brokerage fee is deducted on closing, and sent directly to the brokerage.

Why is a brokerage fee necessary, and why does a borrower have to pay it? Simply – because no-one else is paying the mortgage broker, or the mortgage brokerage.

On a bank deal, the bank will usually pay the mortgage brokerage a commission on closing. The client never sees this amount, and it does not come from the client (at least not directly). It is paid on the “back end”, directly from the bank to the mortgage brokerage.

Contrast that to a private mortgage deal – the lender isn’t giving the mortgage brokerage a commission. So how does the broker make any money? How does the brokerage cover its costs?

If no brokerage fee is charged, the broker is working for free. In fact, s/he is losing money – as they still have licensing, insurance, office, ADVERTISING, etc etc to pay. So by making nothing on your deal – the broker has effectively gifted you her/his money and time. Unless you are a relative of the broker – do not be surprised if this does not go over well …

I was on an appointment recently where we were signing up a private mortgage. So of course there had to be a brokerage fee charged. As always, I explained to the clients that I had to charge them something – as otherwise this entire deal made me and brokerage nothing. In fact, it would cost both me and the brokerage (especially me) for out of pocket costs! What stunned me on this appointment was the suggestion that if the clients did one more deal – somehow there would be a trip to Florida provided, paid for by me.

HOW? How would this occur? The only way is to increase the brokerage fee, to compensate me for buying the trip! And seeing as I like to charge the least amount possible on my deals, by increasing the brokerage fee – who would end up paying for the trip? The clients – with higher fees!

I am also sometimes caught off guard for what some clients think an appropriate fee should be. On their mortgage applications, clients will list their hourly wages as $35, $50, $100 per hour. Yet when presented with the brokerage fee, they are of the view it should be “a few hundred dollars”.

HOW? How can this be? Only part of the fee comes to me, the rest remains with the brokerage (which has its own costs). I have licensing, insurance, office, ADVERTISING, etc that must be paid. And all of this is paid before I make a nickel. So once I spend 10+ hours (for a simple deal), or 100 hours (for a crazy deal) working for you … the fee charged should be “a few hundred dollars”?

If the fee charged is “a few hundred dollars”, the mortgage broker has GIFTED you HUNDREDS of dollars! S/he is not even making their costs back! They would have been better off reading a book, walking the dog, cooking their family a nice meal, donating their time to a local charity.

How is this different than me calling up an expert house painter, spending 15-20 minutes speaking with them on the phone, and then having them over to paint a few rooms in my house? They would – of course – supply their own brushes and paint, ladders, drop cloths. They would – of course – spend hours seeking out the best deal on paint, employing their knowledge and expertise on surface preparation, color matching, sheen, application. After buying all the paint, supplies, fuel, insurance – they would then spend hours painting my rooms and finally present them for my inspection. And then – I would reluctantly offer up “a few hundred dollars” with the suggestion that if they came back and did a few more rooms …. they could buy my family a trip to Florida!

I hope that this post has been entertaining – even amusing. It tries to deal with a painful topic (fees) in a humorous light. But the purpose of the post was to suggest a way forward:

a) When discussing a mortgage deal with a mortgage broker on a private mortgage deal, ask about fees. They might not be able to give you an exact figure, but you should get a pretty good sense of what fees will be charged.

b) Fees MUST be charged in some cases, but they should be reasonable for the service provided. It is unlikely they can be “hundreds of dollars”, but they shouldn’t be crazy high either. I recently ran into a deal where a broker was charging a $30,000 broker fee – IN ADDITION to being compensated $4500 by the lender! If you run into what you think are crazy fees – please just call me. We can discuss what a typical fee would be.

c) You should not expect a mortgage broker – or anyone – to work for free. If they choose to, for whatever reason – being a friend, relative, associate – that is one thing. But a stranger? If you wouldn’t do it, why would they?

It is not unreasonable – or unusual – to be compensated for your work.

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