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).
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.