What Is a Mortgage Broker?

Unless you live under a rock (like I do), you’ve probably heard the term “mortgage broker” get thrown around. You may have heard good things, and you may have heard bad things.

Regardless, a mortgage broker is essentially a middleman between the borrower/homeowner and the bank or mortgage lender. They work directly with both the consumer and the bank to help borrowers qualify for a mortgage, whether it be a purchase mortgage or a refinance.

Borrower/Homeowner <— Mortgage Broker —> Bank/Mortgage Lender

As you can see from my rather rudimentary, yet fairly time consuming diagram above, the mortgage broker acts as a liaison between two important entities. The borrower/homeowner end is the retail side, while the bank/lender end is the wholesale side.

So how does this whole mortgage broker thing work?

Well, once a borrower makes contact with a mortgage broker and agrees to work with him or her, the broker will gather important information. Income, asset, and employment documentation, along with a credit report, are necessary to assess the borrower’s ability to obtain financing. A retail bank would collect the same documentation.

Once the mortgage broker has all the important details, they can determine what will work best for the borrower. This may include setting an appropriate loan amount, loan-to-value, and determining which loan type would be ideal for the borrower.

Of course, the borrower can decide on all these things on their own if they so choose. The broker is just there to help (and make their commission).

When all the details are ironed out, the broker will submit the loan to a lender they work with to gain approval.  During the loan process, the broker will communicate with both the bank and the borrower to ensure everything runs smoothly.

If you use a broker, you won’t actually work directly with the bank. All correspondence will funnel through the broker and their staff.

Mortgage brokers make money by charging a loan origination fee and/or broker fees upfront (they used to get paid via yield spread premium).

They can also offer no cost loans by utilizing a lender credit, which will effectively raise the borrower’s interest rate, but eliminate out-of-pocket costs.

Borrowers can choose if they want to pay these costs at closing or via a higher interest rate. Ask your broker to clearly discuss both options before proceeding.

What they charge can vary greatly, so make sure you do your homework before agreeing to work with a mortgage broker. And ask what they charge before you apply!

Mortgage Brokers Can Shop Your Rate for You

After all the paperwork is taken care of, the mortgage broker will work on behalf of the borrower to find the best (lowest) mortgage rates available. This is the key advantage of a mortgage broker. They have the ability to shop with numerous banks and lenders simultaneously to find the lowest rate and/or the best loan program.

If you use a traditional retail bank, the loan officer can only offer loan programs and corresponding mortgage rates from a single bank. Clearly this would lessen your chances of seeing all that is out there. And who wants to apply more than once for a mortgage?

Keep in mind that the number of banks/lenders a mortgage broker has access to will vary, as brokers must be approved to work with each individually. In other words, one mortgage broker may have access to Wells Fargo’s wholesale mortgage rates, while another may not. The more options the better. So ask the broker for multiple quotes from as many lenders as possible.

Mortgage Brokers Are Your Loan Guide

Mortgage brokers work with borrowers throughout the entire loan process until the deal is closed. Overall, they’re probably a lot more available than loan officers at retail banks, since they work with fewer borrowers on a more personal level.

This is another big advantage over a retail bank. If you go with one of the big banks, you may spend most of your time on hold waiting to get in touch with a representative. Additionally, if your loan is declined, that’s the end of the line. With a mortgage broker, they’d simply apply at another bank.

Mortgage brokers were largely blamed for the mortgage crisis because they originated loans on behalf of numerous banks and weren’t paid based on loan performance.

Studies have shown that these originate-to-distribute loans have performed worse than loans funded via traditional channels.  But the big banks were the ones that created the loan programs and made them available, so ultimately the blame lies with them.

Regardless, you shouldn’t get yourself caught up in the blame game. It is recommended that you contact both retail banks and mortgage brokers to ensure you adequately shop your mortgage. Most borrowers only obtain a single mortgage quote, which certainly isn’t doing your due diligence.

Mortgage Broker FAQ

Are mortgage brokers free?

Like all other loan originators, brokers charge fees for their services, and their fees may vary widely. Additionally, they may get compensated from the lenders they connect you with, or ask that you pay broker fees out of your own pocket. If they aren’t charging you anything directly, they’re just getting paid by the lender, meaning you’ll wind up with a higher rate.  Be sure to explore all options to get the best combination of rate and fees.

Do mortgage brokers cost more?

No, as mentioned mortgage brokers can offer competitive rates that meet or beat those of retail banks, so they should be considered alongside banks when searching for financing.  They have the ability to shop numerous lenders at once so they can find the best pricing based on your needs.

Do mortgage brokers need to be licensed?

While licensing requirements do vary by states, mortgage brokers must be licensed and complete a criminal background check including fingerprinting.  Credit checks and minimum experience are also often required.  Additionally, brokers must usually complete pre-license education and some must take out a bond or meet certain net worth requirements.

Are mortgage brokers regulated?

Yes, mortgage brokers are regulated on both the federal and state level, and must comply with a large number of rules to conduct business.  Additionally, consumers are able to look up broker records via the NMLS to ensure they are authorized to conduct business in their state, and to see if any actions have been taken against them in the past.

Do mortgage brokers service loans?

Typically not.  Mortgage brokers work with banks and lenders that eventually fund your loan.  These banks will either keep the loan on their books or sell it off to another company that may service the loan. Put simply, there’s a good chance your loan servicer may change once or twice after your loan closes.

Are mortgage brokers going out of business?

While mortgage brokers account for a much smaller share of total loan volume these days, they still hold a fairly substantial slice of the pie.

And despite the ups and downs that come with real estate, they will most likely continue to play an active role in the mortgage market because they provide a unique service that large banks and credit unions can’t imitate.

So while their numbers may fluctuate from time to time, their services should always be available in one way or another.



38 Comments

  1. Colin Robertson February 9, 2018 at 10:13 am -

    Char,

    It could be in terms of helping you navigate the loan process and learn more about what you need to do to get approved for a mortgage. A standard bank will probably only tell you yes or no, without much guidance.

  2. Char February 8, 2018 at 7:55 pm -

    I have bad credit and a single mom working a minimum wage job, is this a good option for me or no??

  3. Colin Robertson October 28, 2017 at 1:08 pm -

    David,

    The tricky part sounds like it might be the employment history. That may be why you paid cash for the condos in the past? If so, a mortgage broker might be able to help you navigate the process and find a lender willing to work with you, though you could also search and speak to lenders, credit unions, etc. yourself as you seem fairly well versed on the subject. If employment history is a roadblock, perhaps a bank statement program might work if you have sizable assets. Good luck!

  4. Colin Robertson July 14, 2017 at 12:52 pm -

    Christine,

    A broker might be a good fit because they work with several lenders and can hopefully find a home for your loan, even if it’s small. They may also have insight in terms of the condition of the home and getting it up to speed to pass appraisal.

  5. Christine July 13, 2017 at 9:37 pm -

    Colin,

    I am having a hard time finding anyone to even talk to me about a mortgage loan for a house (due to the condition the house is in). I am looking for a rather small loan. Do you think a mortgage broker could actually help? I don’t want to pay fees to talk to someone who cannot help me.

    Thanks in advance!

  6. Colin Robertson May 22, 2017 at 7:25 am -

    Ray,

    If she has a few days, she should have time to firm up her financing and at least have a good idea as to whether she can get approved. Maybe use that time to have the broker run all her numbers and scrub her file and/or speak with other brokers/banks to ensure all ducks are in a row and any red flags are addressed now.

  7. Ray May 21, 2017 at 7:24 pm -

    My daughter is working with a broker on her first home. Seller has accepted her offer. She has to pay the 500.00 nonrefundable binder fee to the realtor in a few days, yet her broker hasn’t secured her a loan yet. He told her to find a home and get an accepted offer while he was working on it, which she did. My question is, should she pay this fee and trust that he will come up with financing? He and the realtor have told her they feel confident he can make it happen.

  8. Colin Robertson March 23, 2017 at 9:43 am -

    Ali,

    Probably let him know you are working with someone else so you don’t waste his time.

  9. ali moshiri March 22, 2017 at 3:02 pm -

    Hi, I decided to change my mortgage broker before my application approval process, how I can get rid of him?

  10. Jade Brunet October 10, 2016 at 1:00 pm -

    Thank you for providing this information about mortgage brokers. I did not realize that these people were the individuals who worked directly with homeowners and mortgage lenders. It is good to know that they are there to help both sides. Something to consider would be to seek help from a local broker to eliminate an extensive commute and facilitate important meetings.

  11. Colin Robertson September 30, 2016 at 2:40 pm -

    Sarah,

    It’ll probably be tough with a recent BK but speaking to a few brokers might provide some answers. Possibly something via the non-QM route…

  12. Sarah September 30, 2016 at 11:06 am -

    I filled Bankruptcy twice after divorce. First time dismissed because I couldn’t afford mortgage and bankruptcy. Then a few months later filed again. Lawyer failed to complete paperwork and case dismissed. Home was foreclosed. That was December 2015. Have great income. 30 years employment as nurse. Have 7 acres of land. Living with parents. Have two generated children. Need a home. What can I do if anything?

  13. Colin Robertson August 25, 2016 at 4:53 pm -

    Bettie,

    A broker might be useful because they work with dozens of different lenders and can hopefully find a home for your loan among them.

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