Key takeaways
- Mortgage brokers act as go-betweens for homebuyers and lenders, matching borrowers with providers of financing.
- Brokers can find and offer borrowers various options, including unconventional loans and loans from banks that don’t directly work with the public.
- It’s important to interview brokers and understand their specialties and how they’re compensated.
Working with a mortgage broker to navigate today’s housing market can be a wise move, especially for a first-time homebuyer. From finding the best interest rate to completing the application to closing the loan on time, mortgage brokers are well-versed in the home-financing experience. Let’s explore what mortgage brokers are, how they work and how they can help you.
What is a mortgage broker?
A mortgage broker is a go-between who matches borrowers with mortgage lenders. If you’re buying a home or refinancing, a broker can help you find the best mortgage for your needs.
They work with everyone involved in the lending process, including real estate agents, underwriters and closing agents. This collaboration ensures a borrower gets the best loan that closes on time. Mortgage loan brokers also pull the buyer’s credit reports, verify their income and expenses and organize the loan paperwork. Many brokers can access a powerful loan-cost system, as well, which prices a mortgage loan across many lenders at once, thereby streamlining the process.
“A mortgage broker not only helps you get the most competitive rates and pricing, they also help make sure your loan is a good match with the particular lender,” explains Andrew Weinberg, principal at Silver Fin Capital Group in Great Neck, New York. “They can quickly determine the best lender for each individual borrower.”
Mortgage broker vs. lender vs. loan officer
| Mortgage broker | A mortgage broker matches borrowers with potential lenders and loans. Brokers partner with a variety of lenders, including commercial banks, credit unions, mortgage companies and other financial institutions, and can work independently or with a brokerage firm. |
| Mortgage lender | A mortgage lender is the party responsible for providing the funds to the borrower to purchase a home. |
| Loan officer | A loan officer is employed by a bank, credit union or other lender and is limited to providing the loan products their employer offers. Generally, loan officers act as the liaison between the institution and the individual borrowers: assessing them, providing guidance with the application, etc. Sometimes the terms refer to someone who either authorizes or recommends approval for loans, though technically that’s the job of the underwriter. |
Both brokers and lenders “offer” loans — but in different ways. A mortgage broker doesn’t originate or fund mortgages; only lenders actually provide the money. Instead, the broker serves kind of like an agent or financial planner, showing the client various options and then works with the chosen lender on the borrower’s behalf to get the loan approved, closed and funded.
The duties of a mortgage broker and a loan officer are similar in that both help the borrower apply for a mortgage. But, while brokers are independent entities able to work with a variety of lenders, loan officers work directly for a particular mortgage lender. A loan officer is the borrower’s primary contact point if they use a bank, credit union or traditional lender to get a mortgage.
How do mortgage brokers work?
Mortgage brokers act as agents for borrowers, working with many lenders to find them the best mortgage for their situation. Some lenders only work “wholesale” — that is, exclusively through other professionals, not directly with the public — so to have access to their mortgages, a borrower must go through a broker.
But a broker’s job doesn’t stop there. When you apply with a broker, they’ll do the legwork of submitting many applications to lenders for you. They’ll also be able to guide you away from lenders that may have extra fees or other expenses.
Mortgage brokers have a fiduciary responsibility to the borrower. This means that they’re required to work in the borrower’s best interest, not theirs or a lender’s.
Note that brokers do charge a fee that they’ll collect when the loan closes. Either you or the lender will pay it. Also, working with a broker does not guarantee that you’ll get a better deal than if you decide to go without one.
How much does a mortgage broker cost?
The broker’s commission (which is usually paid by the lender) varies, but it typically ranges from 0.50 percent to 2.75 percent of the loan principal. Federal law caps broker fees at 3 percent and requires that they not be linked to a loan’s interest rate.
“Most brokers do not charge the borrower anything at all in most scenarios,” says Weinberg. “The compensation paid to the broker by the lender does not add a penny to the borrower’s closing costs, just like the compensation paid by the big banks to their…loan originators doesn’t add to your closing costs.”
“Prior to the [2008] economic downturn, consumers didn’t see how much a broker got paid, but in today’s mortgage climate, the cost of the loan is charged to the borrower and the lender purchasing the loan provides a credit equal to that cost, resulting in no cost to the borrower,” says Rick Masnyk, a branch manager at Network Funding in North Smithfield, Rhode Island.
In the few instances a broker does charge the borrower for their services, borrowers can expect to pay a fee between 1 to 2 percent of the loan principal. Before you commit to working with a broker, ask about fee structure and what you might be responsible for paying, if anything.
Why use a mortgage broker?
There’s no reason not to work with a mortgage broker, says Masnyk. Borrowers who use a mortgage broker get the benefit of a more personal experience and having a licensed professional do the legwork for them.
“Working with someone you can see face to face and/or someone your Realtor has used in the past and trusts is always a great source,” says Masnyk.
When deciding if a mortgage broker makes sense for you, consider the benefits and drawbacks of using one:
Pros of working with a mortgage broker
- A mortgage broker can help you save on fees: When you get a mortgage, you’re likely to pay an origination fee, application fee and appraisal fee — just to name a few. A mortgage broker may be able to get the lender to waive some or all of those fees.
- A mortgage broker can save you money on the loan itself: When it comes to the actual mortgage, brokers may be able to find a better deal than you could get for yourself. They have access to a broader mix of loans and lenders (including some you wouldn’t have access to as an individual). In particular, a mortgage broker can help you find the best mortgage rate in a rising interest rate environment.
- A mortgage broker can save you time: Brokers do all the research on rates and fees. They negotiate for you, file the paperwork and keep the application process on track.
- A mortgage broker can save you from making a big mistake: Brokers can help you avoid pitfalls with particular loans: They’ve read all the fine print. They know the differences among lenders and the twists and turns in mortgages.
- A mortgage broker can find the right lender for tricky situations: If your credit history or financials aren’t great or the property you’re buying is unusual, a broker can find a lender who offers more lenient criteria or non-QM loans (untraditional mortgages) or who specializes in certain types of properties.
Cons of working with a mortgage broker
- Not all lenders work with mortgage brokers: Brokers may not have access to all loan programs at certain financial institutions.
- You might have to pay the broker: Usually, the lender pays the broker fee, but sometimes the borrower assumes the cost.
- There is potential for conflict of interest: Brokers might favor lenders who pay them commissions or the largest commissions. It’s unlikely (not to mention unethical) that they’ll pressure you to sign with one places just because they’re compensated better. But, they might steer you away from, or not even tell you about, lenders not in their network.
- A broker’s estimate may be misleading: The loan estimate the lender must give you three days after your application may not dovetail with the initial breakdown the broker showed you. Based on your financials, the lender may charge a higher rate or fees, so that the cost of your loan comes out higher.
How to find a mortgage broker
Finding a mortgage broker requires some homework. Here are steps you can take to make your choice:
- Research: Ask your real estate agent, friends and family for referrals. Read online reviews and check with the Better Business Bureau for complaints.
- Narrow it down to a few brokers: Consider a broker’s communication style, level of expertise and how they manage their clients’ needs.
- Interview the brokers: Ask plenty of questions and get a feel for how they work and whether they are knowledgeable about the sort of mortgage you’d qualify for.
- Speak with a former client: Ask them for a reference from a few former clients and make sure you speak with them directly.
Ultimately, it’s up to you to find the best mortgage provider, whether through a broker or loan officer, and to shop around for the best rate and lowest costs.
Questions to ask a mortgage broker
- How much do you charge and who pays your fee? The lender usually pays the mortgage broker. Broker fees can show up on the loan estimate or closing disclosure in several ways, so ask in advance to avoid surprises at closing.
- Which lenders do you work with? Most mortgage brokers have a stable of lenders they work with, and not all brokers work with the same lenders. Confirm the broker works with lenders offering the sort of mortgage products you’re interested in.
- How much experience do you have? As a rule of thumb, choose a mortgage broker who has been in the industry for at least three years. If you’re interested in a specific type of mortgage, ask how much experience the broker has with that kind of loan.
- Are you licensed to do business in my state? Check to see if a mortgage broker is licensed through the Nationwide Mortgage Licensing System and Registry. Their NMLS registration number should also be displayed on their website and email signature.
- Do you have references? Ideally, you have found your mortgage broker through a recommendation from a friend, relative or co-worker, but if not, it’s smart to check references. Ask for names and contact information of several recent clients, then ask them about their experience with the broker.
- How do you handle rate locks? A rate lock guarantees you the interest rate you’re quoted for a certain amount of time, even if rates change. A typical rate lock lasts 30 days or 60 days. If the lender permits, you can add a “float down,” which guarantees you a lower rate if rates fall during your lock period. Ask your broker for a loan commitment or preapproval letter from the lender. It should specify the interest rate and points, the date the rate was locked and when the lock expires.
Mortgage broker FAQ
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Yes, you can get a mortgage directly from a lender without a mortgage broker. You want to look for what’s called a “retail lender,” bank or financial institution, meaning it works with members of the public, as opposed to a “wholesale lender,” which only interfaces with industry professionals — mortgage brokers or other financial institutions. When you work with a retail lender, you’ll usually be assigned a loan officer, who’ll act as your contact and shepherd your application through.
The rise of online mortgage lenders and financial websites (like Bankrate) has made it easier than ever to find and compare lenders without an intermediary like a mortgage broker. -
The potential for conflicts of interest does exist with mortgage brokers. Brokers are legally obligated to act in the borrower’s best interest. However, their fee is often paid by the lender, so (one might wonder): Who are they really working for? Always ask for transparency with a broker — that they share how they’re compensated and what their commission is from any lender whose loan they’re recommending.
Additional reporting by Taylor Freitas
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