Unless you live under a rock (like I do), you’ve probably heard the term “mortgage broker” get thrown around on more than one occasion. You may have heard good things, and you may have heard bad things…
Opinions aside, 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 consumers 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 during the home loan process. The borrower/homeowner end is the retail side, while the bank/lender end is the wholesale (B2B) side.
These three entities don’t all communicate with one another. Instead, the mortgage broker communicates with both parties separately, so you’ll never actually speak to the bank or lender originating your home loan.
And you may not even know who the broker ultimately decided to place your loan with until you receive your loan servicing documentation after the mortgage funds.
Many of the large banks that offer retail services also have wholesale divisions, including Quicken Loans and loanDepot.
So how does this whole mortgage broker thing work?
- Instead of going to a bank for a home loan
- You can have a mortgage broker work on your behalf
- To both shop your rate with multiple lenders
- And manage your loan application from start to finish
There are many similarities between broker and bank, along with a lot of key differences.
Once a prospective borrower makes contact with a mortgage broker and agrees to work with him or her, the broker will gather important financial information.
This includes income (tax returns, pay stubs), asset (savings account, checking account statements), and employment documentation, along with a credit report, all of which are necessary to assess the borrower’s ability to obtain home loan financing. A retail bank would collect the same documentation, so no real difference there.
In the case of a mortgage refinance, they’ll assess current home equity, the property’s appraised value, and use a mortgage payment calculator to see what loan terms the borrower might benefit from, if any.
After the mortgage broker has all the important details, they can determine what will work best in the situation. 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 homeowner can decide on all these things on their own if they so choose. The broker is just there to help (and make their commission).
In fact, it might be in your best interest to do your research beforehand, then see how it stacks up once you speak with a professional to ensure you aren’t steered in the wrong direction.
Mortgage Brokers Can Shop Your Rate for You
- Bank A – lowest mortgage rate available
- Bank B – lowest closing costs available
- Bank C – best combination of rate and fees
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.
They can search through all their lender partner’s programs to find the right fit for you, and hopefully the best pricing too.
For example, they may find that Bank A offers the lowest rate, Bank B offers the lowest closing costs, and Bank C has the best possible combination of rates and fees. They can then submit your loan to Bank C on your behalf.
This is the key advantage of a mortgage broker. They have the ability to compare mortgage rates with numerous banks and mortgage lenders simultaneously to find the lowest rate and/or the best loan program with the fewest costs.
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 for a mortgage more than once?
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. Someone who has been in the business a long time might have established a large number of wholesale partners to choose from.
In other words, one mortgage broker may have access to Wells Fargo’s wholesale mortgage rates, while another may not. Generally, the more options the better. So ask the broker for multiple quotes from as many lenders as possible.
Mortgage Brokers Are Your Loan Guide
- They can be very accessible and hands-on from start to finish
- And find a home for your loan among their many lending partners
- Which is especially useful if you’ve been denied elsewhere
- They can also provide more advanced/tailored recommendations
- Or structure your loan favorably to lower costs
Mortgage brokers work with borrowers throughout the entire loan process until the deal is closed. Aside from gathering paperwork and quotes, they can run your loan scenario through different mortgage calculators to determine the best structure of the deal.
They may also recommend that you limit your loan amount to a conforming amount so it adheres to the guidelines of Fannie Mae and Freddie Mac, or they may suggest that you break your loan into a first and second mortgage to avoid mortgage insurance and/or get a better blended rate.
If you have a particularly hard-to-close loan, they may have options that retail lenders may not, since most of the latter tend to stick to A-paper, vanilla stuff.
For example, if you have bad credit or are a real estate investor, brokers may have wholesale mortgage partners that specialize in mortgage loans just for you. But they may not work on the retail level, so you’d never know about them without your broker liaison.
A retail bank may just give you generic loan choices based on the loan application you fill out, without any further insight in terms of structuring the deal to your advantage. They may even miss a seemingly simple detail that could greatly impact the interest rate you receive, or even jeopardize your loan approval.
So if you’ve already been turned down by a bank, a mortgage broker might be able to save your deal and get you the financing you need. In a sense, they can be compared to financial advisors for the mortgage realm.
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 means they could be a good choice for first-time home buyers, who may need more of a helping hand.
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 often the end of the line. With a mortgage broker, they’d simply apply at another bank, or make necessary changes to turn your denial into an approval. They generally have access to way more loan products.
Mortgage Brokers Can Offer All Types of Home Loans
- Brokers offer all types of mortgages
- From conventional options to FHA, VA, and USDA
- Or jumbo loans and other non-conforming stuff
- Typically offer a very wide product choice because of their many partners
Mortgage brokers can originate all types of loans, from conventional loans to FHA loans and everything in between, depending on the wholesale lending partners they are approved to work with.
Additionally, some may specialize (and be experts) in certain types of offerings, such as USDA loans or VA loans. So if you know you’re looking for a specific type of loan, seeking out one of these specialized brokers could lead to a better outcome.
They may also have partners that originate jumbo mortgages, assuming your loan amount exceeds the conforming loan limit.
When all the details are ironed out, the broker will submit the loan to a lender they work with to gain approval. The loan underwriting will actually take place with the bank, and the broker will let you know the outcome once it’s completed.
During the loan process, the broker will communicate with both the bank and the borrower to ensure everything runs smoothly.
As noted, if you use a broker, you won’t actually work directly with the bank. All correspondence will funnel through the broker and their staff and onto you.
Mortgage brokers make money by charging a loan origination fee and/or broker fees upfront or via lender compensation (in the past they could 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 Were Blamed for the Crisis
- They got a lot of flak for the housing crisis
- Especially since brokered loans exhibited high default rates
- Relative to home loans originated via the retail channel
- But ultimately they only resold what the banks were offering themselves
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.
And most of the loans were quickly resold to investors on Wall Street, as opposed to staying on the bank’s books.
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.
If such mortgage lending didn’t exist to begin with, brokers wouldn’t have been able to offer these types of loans.
Post-crisis, many big banks including the likes of Bank of America have exited the wholesale business to focus on customer-driven strategies, like cross-selling products in-branch.
After all, if they work with the customers directly, they have additional opportunities to sell products like savings accounts, credit cards, and so on.
They can also underwrite and manage all their mortgage loans in-house to ensure nothing slips through the cracks.
Regardless, there’s no sense getting 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.
National Mortgage Brokers Day
- The first ever National Mortgage Brokers Day
- Took place on July 18th, 2018
- Going forward it will be celebrated annually
- To recognize brokers and the services they provide to homeowners
In 2018, the Association of Independent Mortgage Experts (AIME) announced the creation of “National Mortgage Brokers Day,” which is an annual celebration intended to recognize brokers and the services/expertise they provide.
It will take place every July 18th and aims to bring awareness to the profession and the benefits of using a broker as opposed to a retail bank.
Per AIME, brokers have historically not been given the recognition they deserve for being experts in their field.
Mortgage Broker FAQ
Are mortgage brokers free?
Like all other loan originators, brokers charge origination fees for their services, and their fees may vary widely. It costs money to run a mortgage brokerage, though they may run leaner than a big bank, passing the savings onto you.
In terms of commission, they may get compensated from the lenders they connect you with, or ask that you pay broker fees out of your own pocket at closing.
If they aren’t charging you anything directly, they’re just getting paid a broker commission by the lender, meaning you’ll wind up with a higher interest rate to compensate. Be sure to explore all options to get the best combination of rate and fees.
Do mortgage brokers cost more?
Not necessarily; 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.
But it really depends who you use and whether another entity can do better for your specific loan scenario. For example, a broker may have access to excellent refinance rates thanks to a pricing special with a given wholesale lending partner.
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.
What types of loans do mortgage brokers offer?
Depending on who they’re approved to work with, anything and everything from Fannie Mae and Freddie Mac to FHA loans and jumbo loans, streamline refinances, and various other loan types that may only be offered via the wholesale channel.
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.
Where do I find a mortgage broker?
There are a variety of different ways to find one. You might be recommended one by your real estate agent or by a friend or family member. Everyone seems to know one.
Or you can seek out a mortgage broker in your area by reading online reviews. It might be smart to work with someone local who you can sit down and meet with as opposed to one not in your immediate area. And always ask for references!