As a commercial mortgage broker, you have likely dealt with a surety bond at some point in your career. Whether you’ve been licensed for several years or are just getting started down the career path, you should know what a surety bond is, how it works, its costs and how to go about obtaining one when you need it.
There also is an often-overlooked benefit of surety bonds. Mortgage brokers usually purchase surety bonds as a requirement for obtaining a license, but they often fail to use them as a business-building tool. You can use a surety bond to boost your marketing efforts, build trust and stand out in a competitive industry.
Defining surety bonds
Surety bonds often get confused with insurance for the business. A surety bond is a form of insurance, but it works differently in practice. It is an agreement between three parties — you, the bondholder; the surety agency providing the bond; and the state or organization that requires you to have a bond. You typically purchase a bond each year from a surety agency.
The agency will pay financial damages should a client or other party file a legitimate complaint against your bond. Over time, however, you will repay any claims against your bond to the surety agency. This is how a surety bond differs from insurance coverage: The bond protects the customer from business practices that harm them. It does not provide coverage for disasters or accidents that harm the business as insurance would.
A surety bond is often a requirement to work as a licensed mortgage professional. Each state has its own licensing guidelines. Many states require a bond be put in place from the start. The bond is meant to protect your customers, creating a more transparent, safer environment for each transaction.
Surety bonds come at a cost, however. Agencies determine the price as a percentage of the total bond amount. In many states, you will need to obtain a bond in the range of $10,000 to $100,000 to operate legally. Often, however, you’ll only be required to pay between 1% and 15% of the bond amount as an out-of-pocket cost. The higher the bond amount, the higher the price you’ll typically pay.
Other factors also can influence the price. A surety bond is another form of credit extended to you, since you will be required repay any claims made against the bond. For that reason, you will typically have to pay more for the bond if you have less-than-perfect credit or any negative marks, such as missed payments, heavy indebtedness, bankruptcies or court judgments. Additionally, you also may have to pay a higher percentage of the bond out of pocket if you have a history of claims against other bonds, disorganized financial documentation or a poor reputation within the industry.
Obtaining a bond
It is a good idea to check your credit before applying for a surety bond. If there are credit-reporting errors or negative entries that can be resolved quickly, take care of those first as they are likely to boost your credit score quickly.
If no quick fixes exist, work on making on-time payments and avoid using credit too heavily or incurring any more negative marks. Surety agencies also will look at your business financials, such as your balance, cash-flow and income statements. Organize these documents and keep them up to date. This will help keep the cost of your surety bond low.
The good news is that you can still get a surety bond even if you have bad credit. Your first step in obtaining a bond is to work with the right surety agency — one that understands the mortgage business and that helps those with bad credit get through the bond- application process. Be sure to have your documentation ready to review, including your business financials, personal credit history and industry experience.
The application process usually goes quickly. Your surety agency will review your details and provide you with surety-bond options and pricing. Once you select the bond that works best for you and your budget, you will receive your bond certificate.
Sharing the news
You can then use a surety bond as a marketing tool for new customers. Potential clients naturally want to see that you are doing all you can to protect their interests. Obtaining a surety bond is one way of highlighting that fact and building trust. A bond protects the customer from bad business practices. It is a promise to make a customer whole should financial losses take place. Share these points with your clients.
Consider adding your surety bond to your marketing mix. If you send e-mails and newsletters to a list of prospects, add an article or blurb about what a bond is and how it works to protect customers. If you’re using social media to market your business, include periodic posts about bonds and their benefits.
You also should attach a tag line to your e-mail signature about your bond and license. The bond information should be clearly displayed on your website and business cards. Hang a copy of the bond certificate on your office wall. Be sure to point out to recent and prospective customers that you’ve taken the time to get your bond as part of being a licensed mortgage broker. Each of these marketing strategies allows you to put your best foot forward and make a strong first impression with clients. It shows that you can be trusted with their business.
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In most states, surety bonds are an essential part of conducting business, so you need to know how one works, how to obtain it and what is costs. Be sure to spread the word about your bond. Your customers want to feel confident they are choosing the right mortgage broker for the job, and holding a bond is a foolproof way to achieve that all-important first impression with a customer.
