Sometimes, a borrower might confuse a mortgage broker with a loan officer or mortgage lender. However, there are differences between these roles. Before a soon-to-be homeowner takes out a mortgage, they should understand what a mortgage broker is, the benefits of using one, and how to choose the best broker. This guide can help borrowers decide if using a mortgage broker is the right decision.
What Is a Mortgage Broker?
A mortgage broker is the middleman between mortgage borrowers and mortgage lenders. They do not use their own capital to originate loans. Instead, a mortgage broker connects lenders with borrowers based on the needs and financial situations of both. They do this by identifying the best mortgage for each unique borrower.
The broker gathers necessary documentation from the borrower, such as income statements, asset information, bank statements, and employment verification. They will also pull credit reports, assess credit scores, and look at credit card and personal loan debts.
The mortgage broker will complete the loan application and determine the ideal loan amount, loan-to-value ratio, loan terms, and loan type. Then they submit the loan application to a lender for approval and underwriting.
Mortgage brokers can save borrowers time during the application process. They also save them money over the life of the loan. After the mortgage lender distributes the funds, the mortgage broker collects a commission fee as compensation for their services. The broker only gets paid when the loan transaction is complete.
Mortgage Broker vs. Mortgage Lender vs. Loan Officer
Mortgage brokers differ from mortgage lenders and loan officers.
Unlike a mortgage broker, a loan officer is a representative of a financial institution, such as a bank or credit union. They offer direct assistance to borrowers taking out residential mortgage loans. Loan officers, or mortgage loan officers (MLO), are the contact for most borrowers applying for home loans from financial institutions.
Once a borrower agrees to proceed with a lender, the loan officer helps prepare the application. Then they pass it to the lending institution’s underwriter, who assesses the creditworthiness of the potential borrower. If the underwriter approves the loan, the loan officer prepares the closing documents.
A mortgage lender is the one that actually provides funding for the mortgage. Many consumers prefer to use a well-informed mortgage broker to help them find the right mortgage lender. In fact, the reason financial institutions have so many branches is that they want to connect loan officers with potential borrowers. A broker can bridge the gap by helping borrowers and lenders come together.
Some loans are more work than others, such as secured loans versus unsecured loans. Mortgage loans require a hefty stack of documentation. This is because of the many related federal, state, and local regulations.
Mortgage brokers can simplify the mortgage process for both borrowers and loan officers. They do this by ensuring that borrowers have the qualifications required by lenders before taking any steps in the mortgage process.
The Role and Responsibilities of a Mortgage Broker
Navigating the mortgage market can be overwhelming, but a mortgage broker can help.
There is some overlap between a mortgage broker and a loan officer. Both roles know about various loan products. They can help borrowers with buying or refinancing a home. They’re well versed in the mortgage market and can advise borrowers on how to find the right mortgage. Mortgage brokers offer insight into loan eligibility, as they’re responsible for the initial screening process.
A mortgage broker works on the borrower’s behalf to find the lowest available mortgage rates and best loan programs available. To do so, they look into multiple lenders for their clients. The number of lenders accessible to the borrower will be based on the broker’s ability to work with each lender.
Brokers do not receive compensation unless the loan closes. Therefore, it’s in the broker’s best interest to work with borrowers on a more personal level. If a loan originates through a broker but a lender declines it, the broker will then apply to another lender. Meanwhile, if a loan originated through a loan officer is declined, no further action is taken with the financial institution.
Benefits of Using a Mortgage Broker
Working with a mortgage broker saves time and legwork for the borrower. Mortgage brokers know how to navigate the mortgage market and can act as a guide. They have connections with a broad range of lenders. A broker can steer borrowers away from mortgage companies with unfavorable payment terms?.
Mortgage brokers have better access to lenders. In fact, some lenders work exclusively with mortgage brokers, relying on them to bring in leads.
You can contact lenders directly for a mortgage. However, brokers often get lower rates and better terms from lenders because of the business volume they provide. Brokers can also help manage mortgage-related fees, including the application, appraisal, and origination fees that lenders charge.
How Much Do Mortgage Brokers Charge?
Whether buying a home through a real estate broker, real estate agent, or homeowner, borrowers can work with a mortgage broker. Mortgage brokers make a commission that usually works out to 1% or 2% of the loan amount. This differs from loan officers, who get a salary and are not incentivized by loan volume or amount.
How do mortgage brokers get paid?
Mortgage brokers receive their commission from either the borrower or the lender when the loan closes. Usually, the lender pays the mortgage broker, which allows them to advertise a “no-cost” loan. However, the broker’s commission might still be rolled into the loan via a higher interest rate. The broker may charge different fees, depending on who pays their commission.
The mortgage market, home prices, and loan competitiveness will help determine the commission rate a mortgage broker receives. In more competitive markets with high-priced properties, brokers may have lower rates. Federal regulations limit mortgage broker fees to 3%, and they must disclose any fees to borrowers upfront.
How to Choose a Good Mortgage Broker
To find a mortgage broker near you, consider reading online reviews prior to choosing one. Here are some tips on finding the best broker to get a mortgage with favorable rates and terms:
- Referrals work best: Ask someone you know, like a friend or family member, who has recently bought a house to share their experience with a broker. Tell them you want to hear the good and bad.
- Leverage your current bank: Reach out to your current financial institution for mortgage broker references. You already have a relationship with your bank, and it’s in their best interest to help you.
- Ask your real estate agent. Real estate agents can offer guidance on local brokers with solid reputations and who they have a relationship with. Make sure you do your own research, though.
Questions to ask mortgage brokers
Before choosing a broker, be sure to ask plenty of questions. Likely, you’ll be most interested in mortgage rates, but before committing to a particular mortgage broker, ask these questions:
- Do you have a list of lenders you work with?
- Can you provide a complete list of fees you typically charge?
- What’s your normal commission rate, and who pays it?
- Do you have different rates for lender-paid versus borrower-paid commission?
- Will the lender waive some fees, such as the appraisal or closing costs?
- What are the typical down payment requirements?
- Do you work with FHA-, VA- or USDA-approved lenders?
- 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?
A mortgage broker can save you a lot of time when you’re searching for the best mortgage lender. Brokers have a lot of experience helping real estate investors and individuals get home loans. Their expertise can help you get the best deal on a mortgage, and they often have the right connections.
If you need recommendations for mortgage brokers in your area, check out the BiggerPockets forums. Here, you can get advice from people who share your goals and aspirations.
Join the community
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.