A borrower might occasionally mistake a mortgage broker for a loan officer or mortgage lender, but there are key differences between these roles. Before obtaining a mortgage, potential homeowners should understand what a mortgage broker does, the advantages of working with one, and how to select the best broker. This guide aims to help borrowers determine whether using a mortgage broker is the right choice.
What Is a Mortgage Broker?
A mortgage broker acts as an intermediary between mortgage borrowers and lenders. Unlike lenders, mortgage brokers do not use their own capital to originate loans. Instead, they connect borrowers with lenders based on each party’s needs and financial circumstances, identifying the best mortgage options for each borrower.
The broker’s responsibilities include gathering necessary documentation from the borrower, such as income statements, asset information, bank statements, and employment verification. They also pull credit reports, assess credit scores, and review debts from credit cards and personal loans.
Once the broker has all the necessary information, they complete the loan application and determine the ideal loan amount, loan-to-value ratio, loan terms, and loan type. They then submit the application to a lender for approval and underwriting.
By using a mortgage broker, borrowers can save time during the application process and potentially save money over the life of the loan. After the mortgage lender disburses the funds, the broker receives a commission fee as compensation for their services. The broker is only paid upon the successful completion of the loan transaction.
Mortgage Broker vs. Mortgage Lender vs. Loan Officer
Mortgage brokers, mortgage lenders, and loan officers serve different roles in the mortgage process.
A loan officer is a representative of a financial institution, such as a bank or credit union, who provides direct assistance to borrowers seeking residential mortgage loans. Loan officers, also known as mortgage loan officers (MLO), are the primary contacts for most borrowers applying for home loans through financial institutions. Once a borrower decides to proceed with a lender, the loan officer helps prepare the application and forwards it to the institution’s underwriter. The underwriter assesses the borrower’s creditworthiness, and if the loan is approved, the loan officer prepares the closing documents.
A mortgage lender is the entity that provides the actual funding for the mortgage. Many consumers prefer to use a knowledgeable mortgage broker to help them find the right mortgage lender. Financial institutions often have multiple branches to connect loan officers with potential borrowers, but a broker can bridge the gap by bringing borrowers and lenders together.
Some loans, such as mortgage loans, require extensive documentation due to various federal, state, and local regulations. Mortgage brokers can simplify the process for both borrowers and loan officers by ensuring that borrowers meet the qualifications required by lenders before starting the mortgage application process. This helps streamline the entire mortgage process and makes it more efficient for all parties involved.
The Role and Responsibilities of a Mortgage Broker
Navigating the mortgage market can be overwhelming, but a mortgage broker can provide valuable assistance.
While there is some overlap between the roles of a mortgage broker and a loan officer, key differences exist. Both roles are knowledgeable about various loan products and can help borrowers with purchasing or refinancing a home. They are well-versed in the mortgage market and can advise borrowers on finding the right mortgage. Mortgage brokers, in particular, offer insight into loan eligibility as they handle the initial screening process.
A mortgage broker works on behalf of the borrower to find the lowest available mortgage rates and the best loan programs. To achieve this, they search multiple lenders for their clients. The number of lenders accessible to the borrower depends on the broker’s network and relationships with lenders.
Mortgage brokers are only compensated when the loan closes, incentivizing them to work closely with borrowers. If a loan originates through a broker but is declined by a lender, the broker will seek another lender for the borrower. In contrast, if a loan originated through a loan officer is declined, no further action is typically taken with that financial institution.
Benefits of Using a Mortgage Broker
Working with a mortgage broker can save borrowers both time and effort. Mortgage brokers are adept at navigating the mortgage market and can act as valuable guides. With connections to a wide range of lenders, brokers can help steer borrowers away from mortgage companies with unfavorable payment terms.
Mortgage brokers often have better access to lenders, including some that work exclusively with brokers. These lenders rely on brokers to bring in potential clients.
While borrowers can contact lenders directly for a mortgage, brokers often secure lower rates and better terms due to the volume of business they provide. Additionally, brokers can assist in managing mortgage-related fees, such as application, appraisal, and origination fees charged by lenders.
How Much Do Mortgage Brokers Charge?
When buying a home, whether through a real estate broker, agent, or directly from a homeowner, borrowers can choose to work with a mortgage broker. Mortgage brokers typically earn a commission of 1% to 2% of the loan amount. Unlike loan officers, who receive a salary and are not incentivized by loan volume or amount, mortgage brokers are compensated based on the size of the loan.
How Do Mortgage Brokers Get Paid?
Mortgage brokers earn their commission from either the borrower or the lender when the loan closes. Typically, the lender pays the mortgage broker, allowing them to offer a “no-cost” loan to the borrower. However, the broker’s commission may still be incorporated into the loan through a higher interest rate. The fees charged by brokers can vary depending on who pays the commission.
Factors such as the mortgage market, home prices, and loan competitiveness influence the commission rate a mortgage broker receives. In competitive markets with high-priced properties, brokers may offer lower rates. Federal regulations cap mortgage broker fees at 3%, and brokers are required to disclose all fees to borrowers upfront.
How to Choose a Good Mortgage Broker?
To find a reliable mortgage broker, consider reading online reviews and follow these tips to secure favourable rates and terms:
Referrals Work Best: Ask friends or family members who have recently bought a house about their experience with a broker. Get both the positives and negatives to make an informed decision.
Leverage Your Current Bank: Contact your financial institution for mortgage broker references. Since you already have a relationship with your bank, they are likely to provide helpful recommendations.
Ask Your Real Estate Agent: Real estate agents often have connections with reputable local brokers. While their guidance can be valuable, be sure to conduct your own research as well.
Questions to Ask Mortgage Brokers
Before selecting a mortgage broker, it’s important to ask several questions to ensure you make an informed decision. While mortgage rates are likely your primary concern, consider asking the following:
- Do you have a list of lenders you work with?
- Can you provide a complete list of fees you typically charge?
- What is your usual commission rate, and who pays it?
- Do you have different rates for lender-paid versus borrower-paid commissions?
- Will the lender waive some fees, such as the appraisal or closing costs?
- What are the typical down payment requirements?
- What is the typical turnaround time for preapproval?
- How long does it take from choosing a house to closing on the loan?
- Can you provide a list of references?
Final Thoughts
A mortgage broker can save you significant time in your search for the best mortgage lender. With extensive experience assisting both real estate investors and individual homebuyers, brokers can help you secure the best mortgage deals. Their expertise and connections often lead to favorable terms and rates.
