Buying a home in today’s housing market can be a daunting task. Soaring demand for a limited supply of homes has created a seller’s market. The U.S Census Bureau reports the average price for a new single-family home was near $500,000 in January 2022.
Since most people are unlikely to have that much cash handy, prospective homebuyers need to know how to get a mortgage that fits their needs and budget. But it takes time to sort through the many options that banks and other lenders offer, which is why you might want to find a mortgage broker who can do it for you.
Here’s some help in deciding which path is right for you:
- What Is a Mortgage Broker?
- Working With a Bank
- Mortgage Broker vs. Bank: How To Decide
- What To Consider Before Choosing a Mortgage Broker or Bank
- How To Find a Mortgage Broker
- The Bottom Line on Mortgage Brokers vs. Banks
What Is a Mortgage Broker?
When shopping for a mortgage, there are a lot of variables to consider. Each lender sets its own loan terms and establishes its own criteria that borrowers must meet to qualify for a loan. Sorting through it all can be time-consuming and difficult.
That’s where a mortgage broker comes in. Rather than gathering and vetting lenders yourself, the broker does it for you.
A loan broker acts as an intermediary between borrowers and lenders, sort of like a mortgage advisor. A broker will collect and evaluate your financial information, and then use their knowledge of what banks, credit unions, and other mortgage lenders are offering to find the right type of mortgage for you.
Additionally, a broker will help you negotiate terms with lenders, decide which loan is right for you, and assist you throughout the entire mortgage process to closing.
Who’s qualified to be a mortgage broker?
Federal law requires states to license all mortgage loan originators, which includes brokers. Getting a license requires education, training, and testing. You can verify whether a broker is licensed by looking them up through the Nationwide Multistate Licensing System or your state’s licensing agencies.
How do mortgage brokers get paid?
Typically, mortgage brokers are paid entirely via commission. Federal law sets mortgage brokers’ fees at a maximum of 3% of the total loan amount, though most brokers charge between 1% and 2%.
Federal regulations also prohibit mortgage brokers from charging both buyer and lender. Most of the time, their fees are paid by the lender. If a buyer must pay the broker’s fee, it’s usually rolled into the closing costs or the mortgage itself.
Working With a Bank
There’s always the option of doing your own mortgage research. If you already have a relationship with a bank or credit union, then you may want to start there for a couple of reasons.
If you have a history with a lender, then you’re a known quantity. This could make you a less risky borrower compared with someone unfamiliar. That relationship also could prompt your lender to offer better rates or terms to keep you as a customer.
From a consumer standpoint, it can be reassuring to choose a lender you know well. Working directly with your lender also allows you to ask questions and negotiate terms with them directly, instead of communicating through a broker.
Mortgage Broker vs. Bank: How To Decide
There are advantages to both approaches to finding a mortgage. Choosing the right one will depend on your financial situation, how much control you’re seeking, and the level of effort you want to put into the process.
Why use a mortgage broker?
As your intermediary, a broker handles the mortgage process through closing. While that may seem like reason enough to choose a broker, here are some additional advantages.
A wider selection of mortgages
When working with a bank, you only have access to the loans it can offer. Mortgage brokers may shop around with multiple lenders to find the best home loan to fit your needs.
“A mortgage broker shops for buyer’s loans with many different lenders, searching for the best rates with the best programs, tailored to the needs of the borrowers,” says Linda McCoy, a mortgage broker based in Mobile, Alabama, and board president of the National Association of Mortgage Brokers. “They work to build multiple choices, so that consumers can choose which loan is the best for them.”
In some cases, brokers may specialize in mortgage options for veterans, reverse mortgages, or government-backed loans from the Federal Housing Administration or U.S. Department of Agriculture.
Getting a mortgage requires a lot of paperwork. Lenders often need financial documents like pay stubs, W-2 forms, bank statements, and various forms of identification just to get an application started. As you move further along the process, your mortgage broker can help you avoid any pitfalls that can come up.
“Brokers might spend months or even years working with a client, guiding them through the process,” McCoy says. “Brokers do a lot of critical hand-holding for first-time homebuyers, seniors, and people who just do not understand the process.”
Why use a bank?
There’s a reason why the concept of banking is as old as civilization itself. Some borrowers prefer to have that level of certainty and trust involved in working with an established lender, even if it costs them a bit more. Here are some additional reasons you may want to use a bank.
Benefit from existing banking relationships
Banks are risk-averse institutions. If you already have a good working relationship with your lender, then it could be more likely to offer a better rate or allow you to negotiate.
Direct access to the lender
Since a broker is your mortgage intermediary, you must go through them any time you want to communicate with the lender. By working directly with a bank, you have direct access to the people who can answer your questions.
What To Consider Before Choosing a Mortgage Broker or Bank
When deciding between a mortgage broker and a bank, there’s a lot to keep in mind. No two options are the same, so it’s important that you go into the mortgage process with enough information.
Buyers should check the professional reputation of prospective brokers, says Steve Hill, a mortgage broker for SBC Lending in Redondo Beach, California.
“Make sure it’s someone who seems trustworthy, and ideally someone who came from a personal referral,” Hill says. “You want to go with someone who knows what they’re doing, and most likely has years of experience.”
Another thing to remember is that the bank issuing your loan might not always service it. Mortgages often are sold to other servicers, leaving the borrower to deal with an institution they did not choose.
“Unfortunately, many banks sell their loans, so you can’t really count on them always servicing your loan,” says Corey Vandenberg, a mortgage loan officer with Success Mortgage Partners in Plymouth, Michigan.
How To Find a Mortgage Broker
If working with a broker is the way you decide to go, here are some tips to make your search for the right one a little bit easier.
If you know someone who has used a mortgage broker, you can learn from their experience. Your friends and family could point you in the direction of a broker that they have used and would recommend.
“Look for local brokers in your hometown that have a track record of helping people in the neighborhoods that are appealing to you,” McCoy says.
Verify prospective brokers
It’s a good idea to interview multiple candidates and verify their qualifications before choosing a broker to work with. Take time to look up candidates in the NMLS and with relevant state agencies to verify they have the proper licenses and certifications.
Ask key questions
You want to find a broker who will suit your needs and you’re comfortable working with. Here are some questions to ask prospective brokers that can help you decide on the right one:
- How long have you been a mortgage broker?
- Which banks do you typically work with?
- What loan options do you have access to?
- What is your success rate?
- Do you have any references I can contact?
- How much do you charge and who will pay your fee?
The Bottom Line on Mortgage Brokers vs. Banks
Buying a home can be a difficult process, with obtaining a mortgage being one of the biggest hurdles. Working with a mortgage broker or directly with a bank is up to you. What’s most important is that you get a mortgage that works for your situation, helps you secure that new home, and sets you up for a prosperous financial future.