What Is a Mortgage Broker?
A mortgage broker is an intermediary who brings mortgage borrowers and mortgage lenders together, but who does not use their own funds to originate mortgages.
A mortgage broker helps borrowers connect with lenders and seeks out the best lender for the borrower's financial situation and interest-rate needs. They do the legwork so a borrower doesn't have to.
The mortgage broker also gathers paperwork from the borrower and passes it along to a mortgage lender for underwriting and approval purposes. The broker earns a commission from either the borrower, the lender, or both at closing.
A mortgage broker should not be confused with a mortgage banker, which closes and funds a mortgage with its own funds.
Key Takeaways
- A mortgage broker is a financial intermediary who matches home borrowers with potential lenders in order to obtain the best possible mortgage terms for the borrower.
- A mortgage broker can save a borrower time and effort during the application process, and potentially a lot of money over the life of the loan.
- Mortgage brokers earn commissions, known as origination fees, based on the size of the loan, and may work independently or as en employee of a larger mortgage brokerage firm.
- You don't have to work with a mortgage broker to get a mortgage.
- However, some lenders only work with mortgage brokers so a broker may be a good option when seeking a home loan.
How Mortgage Brokers Work
A mortgage broker serves as the intermediary between borrowers and lenders in the real estate market. Whether a potential borrower is buying a new home or refinancing, a mortgage broker is responsible for presenting loan options from various lenders to the borrower for consideration, while qualifying the borrower for a mortgage with those lenders at the same time.
Additional Responsibilities
The mortgage broker also gathers from the borrower the financial information needed for the mortgage application process. This information pertains to income, assets, debt, employment documentation, a credit report, and other data lenders can use to assess the borrower’s ability to secure financing and pay a loan. The mortgage broker then passes it on to potential lenders.
The broker determines an appropriate loan amount, loan-to-value (LTV) ratio, and the borrower’s ideal loan type. They then submit the application to a lender for approval. The broker communicates with the borrower and the lender during the entire transaction through closing.
Once agreed upon, mortgage funds are loaned in the name of the mortgage lender, and the mortgage broker collects a commission called an origination fee from the lender as compensation for their services. The borrower may be responsible for paying all or part of that fee in the closing statement. The mortgage broker only gets paid when the loan transaction is completed.
Borrowers should search online reviews and ask for referrals from real estate agents, friends, and family for a mortgage broker who has the right credentials for the borrower's level of experience. It's important to work with an individual whom you trust and who provides good service.
The Consumer Financial Protection Bureau is authorized to maintain oversight over mortgage brokers, as well as loan originators and servicers.
Advantages and Disadvantages of Mortgage Brokers
Advantages
- Mortgage brokers can save borrowers time and effort by finding a variety of potential lenders for them.
- They can help borrowers avoid lenders who may not meet their needs or even be unscrupulous.
- The can provide borrowers with access to lenders that might otherwise not be available to them.
- They can offer impactful financial savings through potential fee waivers and better loan rates.
Disadvantages
- Some lenders you contact directly could offer the same or better terms they'd offer through a mortgage broker.
- You pay a fee for a mortgage broker's services.
- Some lenders don't work through mortgage brokers and you could miss out on a lender offering attractive loan terms.
- Some mortgage brokers may have conflicts of interest, e.g., direct you to lenders who pay them more rather than to those who are better for your needs.
Mortgage Brokers vs. Loan Officers
When consumers wish to buy or refinance a home, often their first step is to contact a loan officer in a local bank or credit union. A bank loan officer offers programs and mortgage rates from a single institution.
By contrast, a mortgage broker works on a borrower’s behalf to find the lowest available mortgage rates and/or the best loan programs available through multiple lenders.
However, the number of lenders a mortgage broker can access is limited by their approval to work with each lender. That means that borrowers are generally best served by doing some of their own legwork as well in order to find the best deal.
A mortgage broker often works with several clients at one time and does not get paid unless a loan closes. This encourages mortgage brokers to work with each borrower on a more personal level. If a loan originated through the efforts of a mortgage broker is declined, the broker applies to another lender.
A loan officer from a big bank may keep a borrower waiting for an extended period of time because the officer is working with many borrowers at once. If a loan originating through a loan officer is declined, no further action is taken by the loan officer or bank.
Some lenders work exclusively with mortgage brokers, providing borrowers access to loans that would otherwise not be available to them. In addition, mortgage brokers can get lenders to waive application, appraisal, origination, and other fees. Big banks work exclusively with loan officers and do not waive fees.
Can I Get a Home Loan Without a Mortgage Broker?
Yes, you can. However, finding a home loan isn't easy and a mortgage broker can do the heavy lifting for you. Their essential purpose is to match borrowers with lenders.
Do Mortgage Brokers Have Conflicts of Interest?
Perhaps. Since mortgage brokers usually earn a commission when they bring lenders business, there's room for a fundamental conflict of interest. Also, they could potentially steer borrowers to lenders that pay them better than others (lenders that may suit a borrower better). Loan officers who are paid salaries rather than commissions aren't motivated in this way.
Why Would You Go to a Mortgage Broker?
Mortgage brokers may be a good fit for you when seeking out a mortgage because they can provide you with access to various lenders that you'd otherwise not learn about. They can help you with the large amount of paperwork you'll need to provide and your loan application. Also, some lenders only work through mortgage brokers.
The Bottom Line
A mortgage broker is a type of broker who matches home loan seekers with lenders offering the best loans for their needs. They can save borrowers an enormous amount of time and effort (and possibly money) relating to the mortgage process, for a fee.
Be sure that you do the proper amount of research into mortgage broker costs, reputation, services, and benefits before you decide to enlist the help of a broker rather than get a mortgage yourself.
