Mortgage Brokers: What do they do, how to choose and should you get one?

What is a Mortgage Broker?

When talking about real estate, the term “mortgage broker” is used quite often, but what exactly is a mortgage broker? A mortgage broker is someone that you hire to work as a match maker. They are the ones that match you up with a bank or lender to issue you your mortgage. A mortgage broker is a middleman between the borrower and the bank or lender. In reality, you may not know who the broker decides to place your loan with until you receive your loan servicing documentation after the mortgage funds, as many of the large banks that offer retail services have wholesale divisions, like Quicken Loans.

What does a Mortgage Broker do?

A mortgage broker works with the consumer and the bank to help consumers qualify for a mortgage. The broker is a liaison between both sides during the home loan process, communicating with both sides separately so you’ll never need to actually speak to the bank or lender that is originating your loan. Since the mortgage broker will be deciding something very important on your behalf, they will first need to collect all your important financial information. This would include pay stubs, bank statements, tax returns, checking account statements, a credit report, etc. Basically, you would provide them with anything that is mandatory in order to obtain a mortgage. The biggest advantage and benefit of a mortgage broker is that they are able to compare multiple mortgage rates from different lenders and find the lower rate or mortgage loans with the lowest costs. As regular people, we’re not licensed nor do we have the connections that brokers have to see what is available at one time. Mortgages brokers work with all types of mortgages. They work with FHA Loans, conventional loans, jumbo loans, mortgage refinances, etc.

How do mortgage brokers make money?

According to the National Association of Mortgage Brokers, mortgage brokers are mostly paid by lenders from 0.50% to 2.75% of the loan amount. There are also less popular kinds payment where you can choose to pay the broker yourself, known as “borrower-paid compensation.” In reality, the home prices in your local market will have a big hand in what brokers charge, but there are federal limits as to how high these charges can go. For instance, with the Dodd-Frank Act, brokers are not allowed to more than 3% in points and fees.

What is the difference between mortgage brokers and direct lenders?

The main difference is that a lender is a financial institution that makes loans directly to you, whereas a broker does not lend money. The broker will find you the lender and may work with multiple lenders to find you the best deal. Regardless of which you go with, you should shop around loan terms and best interest rate for you first.

What Are the Advantages of Mortgage Brokers?

Big advantages of working with a mortgage broker include

  • Tap into the broker’s knowledge of loan options
  • Utilize the broker to comparison shop for you
  • Have the broker apply for a variety of loans for you
  • Potential to get wholesale mortgage rates
  • If you have a lower credit score, the broker could still connect you with a lender that would be able to help you get the best mortgage for your situation due to their understanding of the lender landscape

In the case of a mortgage refinance, mortgage brokers will assess the current home equity and appraised value, then use a mortgage payment calculator to see the loan terms the borrower could qualify for. When the broker has all the details, they can set an appropriate loan amount and loan type that would be perfect for the borrower. This is something that a homeowner could do themselves, but the broker can help throughout the process. A mortgage broker can shop at multiple lenders to find the lowest mortgage rate available, lowest closing costs and the best combo of rates and fees. Remember, they are working on your behalf to find the best mortgage rates available for your situation.

Mortgage brokers should be hands-on from start to finish, finding a home for your loan by looking at many lending partners. Mortgage brokers are especially useful if you’ve previously been denied for a home loan as they can provide more advanced recommendations. If you have a particularly hard-to-close loan, they may have options that retail lenders may not.

In reality, there are a lot more mortgage brokers available than loan officers at retail banks, as they work with fewer borrowers. This means they could be a good choice for first-time home buyers, who may need their hand held throughout the mortgage process.

Finally, mortgage brokers can offer multiple types of home loans as they work with a lot of banks. This means they can offer anything from conventional home loans to FHA, VA, USDA, jumbo loans or non-conforming loans. These brokers can facilitate these varying types of loans based on the wholesale lending partners they have been approved to work with.

How Can I Find a Mortgage Broker?

Brokers are usually recommended by your real estate agent or by a friend. You can also find one online that works in your local area or the area you want to live in. If you’re looking for one, there are lots of mortgage broker overviews online to help you in your search for the best loan.

What Questions Should I Ask to Decide on a Mortgage Broker?

Can I qualify for the mortgage?

Based on your finances, your broker should be able to set clear expectations on the type of interest rate and loan terms you could feasibly get.

What are your broker fees?

Some brokers are compensated based on % of loan amount so they may steer you to higher loan amounts. It is good to know how they are compensated so you can better understand if they have an incentive to steer you one way or the other.

What lenders do you work with?

Many lenders don’t work with brokers and only have in-house loan officers. To be completely thorough, you should ask your broker how big their lender pool is, as it makes sense to go with a broker if they have a huge pool of lenders.

What is the benefit of working with you vs. directly with the lender?

You should feel 100% that the broker will be providing true value to you to continue on with them. After speaking to the broker, know exactly what they will be providing and if its not up to your expectations, move on.

Can I speak with a former client?

It is important to get a testimonial from a former client to truly see that the broker has provided value in the past. At the least, you will see if the broker readily supplies this or is hesitant, which can give you direction on which way to go.

Do You Need a Mortgage Broker?

The answer to that question is no. No, you do not need a mortgage broker in order to get a mortgage. You are completely free to go about shopping yourself and do your own research on mortgage lending. A great candidate for a mortgage broker is someone who has an incredibly busy schedule or someone that is looking to purchase investment property in a different area. If you’re looking to buy property in a different state, mortgage brokers are great because they do all the work for you while you’re remote. Someone who doesn’t have time because they have so much going on will also greatly benefit from a mortgage broker. Since mortgage brokers are commission based, it might be wise to do a little bit of your own research and compare the results. This way, you’ll know if the mortgage broker truly has your best interest in mind. It’s also important to see if your broker is commission based or if they charge a fee upfront. The bottom line is that you need to make sure you find a mortgage broker that understands your financial situation, has complete understanding of all loan programs and can help you during the loan application process. It’s important to do your due diligence before selecting a mortgage broker, including checking out online reviews where applicable and speaking to the broker directly.

Additional Mortgage Broker FAQ

Are mortgage brokers free?

Brokers charge origination fees for their service and fees may vary widely. These brokers may get compensated from the lenders they connect you with or you may need to pay broker fees at closing.

Do mortgage brokers cost more?

Mortgage brokers can offer competitive rates that meet or beat those of retail banks, so they definitely should be an option when searching for financing. These brokers can shop numerous lenders to find you the best pricing for your situation

Is licensing a requirement?

Mortgage brokers need to be licensed and complete a background check, with credit checks and minimum experience criteria often required. These brokers often need to also complete pre-license education and meet certain net worth requirements.

Are mortgage brokers regulated?

Mortgage brokers are federally and state regulated, having to comply with a big number of rules to conduct business. Their records can be looked up via the NMLS to verify if they can conduct business in a specific state.

Where do I find a mortgage broker?

There are many ways to find a mortgage broker. Common ways include being referred to by a friend, family member or real estate agent. You can always do your own research online via online reviews.

Are mortgage brokers going out of business?

Mortgage brokers should continue to play a big part in the mortgage market as they provide a niche service that larger banks and credit unions can’t reproduce.

What loan types are offered by mortgage brokers?

Mortgage brokers can offer anything from Fannie Mae to FHA to Jumbo and Streamline Refinances. They can offer all loan types that may be offered only via the wholesale channel.

Do mortgage brokers actually service the loans?

Mortgage brokers typically work with banks and lenders to fund your loans, with the banks keeping the loans on their books are selling it off to another that may service it. Most likely your loan servicer will change after your loan closes.