5 Things Mortgage Brokers Need To Know About Surety Bonds

By Todd Bryant

While surety bonds might seem like just another thing on your to-do list, they are an indispensable requirement in the mortgage broker licensing process. If you’re a mortgage broker, or planning to become one, it’s important to learn everything you can about what surety bonds are for, and how you can make them work for you.

Mortgage broker bonds are, in fact, a formal guarantee that your business is legitimate. Some businesses proudly underline that they are bonded, and thus secure to work with. This means that your bonded status can drive sales by boosting your reputation.

But to strengthen your understanding of bonds, let’s take a look at the basic information about surety bonds for mortgage brokers. With a clearer picture, the bonding process for your mortgage brokerage will surely be smoother.

1. What are surety bonds, really?

A surety bond is a third-party guarantee that the Principal (the bonded party) will follow any relevant contractual agreements or other rules and regulations set by the Obligee (the party that requires the bond). During the bonding process, the surety bond provider issues the bond, which acts as a safety net for the Obligee that its requirements will be followed by the Principal.

Surety bonds are not a protection for your business, but rather proof that your company is a trustworthy one. They are often required in order to get a license for operating as a mortgage broker, auto dealer, freight broker, and the like. They are also a prerequisite for construction projects for building contractors.

2. The way mortgage broker bonds work

In the case of mortgage broker bonds, the Principal is the mortgage broker; a broker needs a license in order to do business and needs the bond for this purpose. Licenses are managed by the Nationwide Mortgage Licensing System. Still, each state (the bond Obligee) has its own requirements that mortgage brokers should meet to work legally within its borders. This applies to the mortgage broker bond too, so if you operate in more than one state, you’d need bonds for each one.

When a mortgage broker gets bonded, the bond acts as an external financial guarantee that the broker will uphold any rules and regulations required by the state. If there is a breach, the state can make a claim on the bond.

For example, if you are aware that a client cannot repay a mortgage but you still approve her, this can lead to a claim against your brokerage. If the case is proven in court, the surety bond provider covers the financial penalties up to the limit of the surety bond.

However, this is only the first stage. Afterwards, the mortgage broker needs to fully reimburse the surety bond company. This is why, as stated earlier, the bond is not a protection for your business; your liability insurance has this function.

3. The price of mortgage broker bonds

As with all surety bonds, the Principal needs to pay a percentage of the bond price in order to get bonded. This means that you as a mortgage broker will have to pay a percentage of the bond amount that the state in which you operate has set.

The actual premium depends on many factors. These often include your financials, professional experience, and credit score. If your financial situation is not good or you don’t have much experience in the field, you are likely to pay a higher price. The usual price is between 1 to 4 percent of the bonding amount required.

If your credit score is below 650, it’s highly probable that you will be considered a high risk applicant. There are still options to get bonded, however, as some surety bond agencies have bad credit programs. Your premium is likely to be between 5 to 15 percent, sometimes even up to 20 percent of the bonding amount. While the bond price will be higher, these programs allow you to stay in business.

4. Ways to save on bonding

It’s always a good idea to select your surety bond provider carefully. This will guarantee that you will get the best terms for the bonding service, both pricing and bonding conditions.

Surety bond agencies that work with multiple bonding companies are your best choice. Look for T-rated and A-listed bond underwriters, as they are both secure and usually cheaper. Bigger companies can offer more attractive bonding rates, as they rely on the strength of their wide portfolios.

Naturally, you can save on your mortgage broker bond by improving your personal financial situation. For example, keep an eye on your credit debt and make sure you don’t have outstanding bills when you apply for a bond. The better your stats are, the lower the bond price you’ll need to pay.

5. Online bonding can streamline the process

Luckily for mortgage brokers, getting bonded can be done online. This means less time wasted in unnecessary procedures and office visits. In addition, it might even reduce the price of the bonding process, as many surety bond agencies prefer this way of handling clients and offer price reductions.

Some surety bond providers offer the option to receive an instant quote in order to get an idea about the costs. Usually the quote is not the final amount, but still gives an orientation. If you decide to go through with the bonding after you get a quote, you'll fill out an online application. Once you provide all relevant documents, you can go through the bonding process -- with ease -- and you'll be on your way to obtaining your mortgage broker license.

Mortgage broker bonds might seem mysterious at first, but in practice, their function is quite straightforward.