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You’ve probably heard the term "mortgage broker" from your real estate agent or friends who’ve bought a home. But what exactly is a mortgage broker and what does one do that’s different from, say, a loan officer at a bank?
Here are answers to common questions about working with mortgage brokers.
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1. What is a mortgage broker?
A mortgage broker acts as a middleman between you and potential lenders. The broker’s job is to compare mortgage lenders on your behalf and find interest rates that fit your needs. Mortgage brokers have stables of lenders they work with, which can make your life easier.
Mortgage brokers are licensed and regulated financial professionals who do a lot of the legwork. They gather documents from you, pull your credit history and verify your income and employment, using the information to help you apply for loans and negotiate terms in a short time.
“Mortgage brokers are licensed financial professionals. They gather documents, pull your credit history, verify income and help you apply for loans.”
Once you settle on a loan and a lender that works best for you, your mortgage broker will collaborate with the bank’s underwriting department, the closing agent (usually the title company) and your real estate agent to keep the transaction running smoothly through closing day.
2. How does a mortgage broker get paid?
Mortgage brokers are most often paid by lenders, sometimes by borrowers, but, by law, never both. That law — the Dodd-Frank Act — also prohibits mortgage brokers from charging hidden fees or basing their compensation on a borrower’s interest rate.
You can also choose to pay the mortgage broker yourself. That’s called "borrower-paid compensation."
Borrowers are encouraged to shop around for mortgage brokers and should ask how much they can expect to pay in fees, which are typically 1% to 2% of the loan amount.
The competitiveness — and home prices — in your market will have a hand in dictating what mortgage brokers charge. Federal law limits how high compensation can go.
3. What makes mortgage brokers different from loan officers?
Loan officers are employees of one lender who are paid set salaries (plus bonuses). Loan officers can write only the types of loans their employer chooses to offer.
Mortgage brokers, who can work within a mortgage brokerage firm or independently, deal with many lenders to find loans for their clients. Mortgage brokers may be able to give borrowers access to a broad selection of loan types.
4. Is a mortgage broker right for me?
You can save time by using a mortgage broker; it can take hours to apply for preapproval with different lenders, then there's the back-and-forth communication involved in underwriting the loan and ensuring the transaction stays on track. A mortgage broker can save you the hassle of managing that process.
But when choosing any lender — whether through a broker or directly — you'll want to pay attention to lender fees. Specifically, ask what fees will appear on Page 2 of your Loan Estimate form in the Loan Costs section under "A: Origination Charges."
Then, take the Loan Estimate you receive from each lender, place them side by side and compare your interest rate and all of the fees and closing costs.
That head-to-head comparison among different options is the best way to make the right choice in one of the largest purchases in your life.
5. How do I choose a mortgage broker?
The best way is to ask friends and relatives for referrals, but make sure they have actually used the broker and aren't just dropping the name of a former college roommate or a distant acquaintance.
Learn all you can about the broker’s services, communication style, level of knowledge and approach to clients.
Another referral source: your real estate agent. Ask your agent for the names of a few brokers that they have worked with and trust. Some real estate companies offer an in-house mortgage broker as part of their suite of services, but you’re not obligated to go with that company or individual.
Finding the right mortgage broker is just like choosing the best mortgage lender: It’s wise to interview at least three people to find out what services they offer, how much experience they have and how they can help simplify the process.
Check your state’s professional licensing authority to ensure they have mortgage broker’s licenses in good standing.
Also, read online reviews and check with the Better Business Bureau to assess whether the broker you’re considering has a sound reputation.
» MORE FOR CANADIAN READERS: Mortgage brokers in Canada: What they do