Mortgage brokers are the matchmakers of the mortgage industry. They provide an important service by matching qualified borrowers with mortgage lenders who are ready to lend to them. This service is particularly important for first-time home buyers, borrowers with unique financial situations, and those who simply don’t have time to shop for a mortgage.
However, because mortgage brokers are entrusted with private financial information and often have considerable sway over an important financial decision, many states require them to become licensed before they begin offering their services to clients. One important part of the mortgage broker licensing process is obtaining a mortgage broker surety bond and submitting it to the state. What is a mortgage bond, and what does a mortgage broker need to do to obtain one? In this guide, we’ll discuss how mortgage brokers can get a mortgage broker surety bond, including the application process and the factors that affect the cost.
What Is a Mortgage Broker Surety Bond?
Mortgage broker surety bonds are legal contracts that guarantee a broker’s legal and financial obligations to their clients. Through the surety bond, a mortgage broker’s clients are financially protected against any unethical or illegal acts that a mortgage broker might commit.
The SAFE Act introduced surety bond requirements for mortgage brokers and lenders as part of the reforms enacted in the wake of the 2008 financial crisis. To help ensure that mortgage professionals don’t engage in the misconduct that was partially responsible for crashing the U.S. housing market, regulators created surety bond requirements that keep brokers and lenders accountable.
In the terminology of surety bonds, the mortgage broker is the principal or the party that purchases the surety bond to guarantee its obligations. The state government is the obligee or the party that enforces the surety bond requirement on the principal. The surety is a neutral third party that writes the bond providing the financial guarantee and investigates claims filed against the bond.
One of the most important aspects of surety bonds is that, unlike a normal insurance policy, the principal must reimburse the surety for the full amount that the surety pays out for a valid claim. Thus, with a surety bond, the financial risk ultimately still rests with the principal; the surety’s job is to investigate and settle claims in a timely and reliable manner rather than to shoulder the principal’s risk.
Who Needs a Mortgage Broker Surety Bond?
In almost every state, anyone who plans to work as a mortgage broker will need a mortgage broker surety bond. However, some other types of businesses may require similar bonds that are classified with mortgage broker surety bonds. Mortgage lenders, loan servicers, and loan originators may all require surety bonds, depending on the laws of your state.
As previously mentioned, a state licensing agency or financial regulator is the obligee for a mortgage broker surety bond. A mortgage broker or lender will typically need to submit their surety bond along with their mortgage broker license application to the relevant agency. In many states, you’ll need to submit the bond through the Nationwide Multistate Licensing System, a national regulatory body that provides a digital database of mortgage brokers.
What Affects the Cost of a Mortgage Broker Surety Bond?
How much can a mortgage broker license applicant expect to pay for their mortgage broker surety bond? The answer to that question depends on several factors that the surety will look at during the underwriting process:
- Coverage Amount: Because a principal pays a percentage of the bond’s coverage amount as a premium, the required coverage amount is the first factor that affects surety bond cost. Coverage amounts vary widely between states, and the percentage can be anywhere from 0.5 to 10% of the bond amount.
- Credit Score: A surety considers a principal’s credit score to be an indicator of their financial risk level. Thus, an applicant with a higher credit score will typically pay a lower premium than one with a lower credit score.
- Personal and Financial History: Sureties also examine applicants’ financial and personal histories for things like previous bond claims, felony convictions, bankruptcies, and lawsuit judgments.
- Industry Experience: New businesses and/or principals without extensive experience in the mortgage industry may be subject to increased bond premiums.
Note that having bad credit, bankruptcies, or other marks on your record doesn’t mean you won’t be able to obtain a mortgage broker bond. It does, however, mean that you’ll need to find a surety that offers options for obtaining a surety bond with bad credit.
Steps to Apply for Your Mortgage Broker Surety Bond
The application process for a mortgage broker surety bond is relatively straightforward, but it’s a good idea to be familiar with the process before you begin. These are the basic steps a mortgage broker will take to get their mortgage broker surety bond:
- Find a surety that offers mortgage broker bonds.
- Submit a quote request to the surety and enter the required information about your business and your financial history.
- The surety will send you a quote for your premium, based on the underwriting factors previously discussed.
- Either apply to a different surety for another quote or pay the premium.
- The surety will send you the paperwork for the bond once you’ve paid the premium.
- Submit your completed surety bond through the required regulatory channels. Some surety bond companies offer the option to submit it for you.
Hundreds of sureties exist nationwide, and getting quotes from all of them to compare prices is something that very few people have time for. What many mortgage professionals choose to do instead is to apply through a surety bond broker that works with numerous sureties at once. When you apply through a broker, one application will get you the best quote from among many sureties. It’s a faster and more efficient way to get your surety bond, and you’ll often end up getting a lower premium.