Equity, broker, escrow, convey — with all the unusual terms in real estate, sometimes it can feel like homebuyers are required to learn a foreign language! Whether you’ve purchased a home before or you’re a first-time homebuyer, “mortgage broker” is probably one of those terms that you don’t think about on a daily basis. So what is a mortgage broker?
A mortgage broker, either a company or a licensed individual loan officer, specializes in connecting homebuyers with multiple lenders. Those lenders will underwrite and fund your loan, and your mortgage broker will earn a mortgage broker origination fee for their broker services. Conversely, licensed loan officers can also work directly for single banks or “direct lenders” that will underwrite and fund your loan themselves.
Mortgage brokers follow the market and make the networking connections to maintain up-to-date knowledge of the home loan industry; they can often offer multiple programs and rates as they can shop between various lenders. This can mean good things for a homebuyer who’s looking to obtain a mortgage loan — though there are some drawbacks to consider.
Some have likened mortgage brokers to travel agents, who shop for the best products and deals on your behalf. This comparison is somewhat true on a basic level, but it’s not completely accurate.
Working with a mortgage broker can save you some time and hassle in the home loan process. But committing to a mortgage is far from Caribbean-cruise easy. In the high-stakes business of home loans, you’ve got to be sure that you understand the pros and cons of using a broker, and that your mortgage broker clearly understands your needs and desires and can deliver a great mortgage loan scenario for you.
With that in mind, we talked with Jessica Sanchez, Director of Underwriting and Loan Management at HomeLight Home Loans, and Debbie Cross, an experienced mortgage broker in Merritt Island, Florida, in order to help you answer this one important question:
Is a mortgage broker right for your homebuying situation?
Mortgage broker vs. lender vs. loan officer
Let’s start by defining some of the key players and how they differ from one another.
- Lender: A lender, in general, is the entity loaning the money on a mortgage. The lender can be a bank, credit union, or a non-depository lender, often called a “direct lender”, that focuses only on underwriting and funding mortgage loans and doesn’t handle other traditional banking functions.
- Mortgage broker: A mortgage broker is a licensed company or individual that works with several lenders on a commission basis. Very similar to an “insurance broker” who shops and negotiates policies with multiple direct insurers, the mortgage broker’s job is to “shop” among multiple lenders in order to find you a competitive loan.
- Loan officer: A loan officer is the licensed individual that either works for a mortgage broker company or a mortgage lender and is licensed to negotiate the terms of your mortgage and find you a mortgage product that meets your needs.
What does a mortgage broker do?
Sanchez explains that mortgage brokers have relationships with several different lenders that offer mortgages to homebuyers and homeowners. Their job is to locate loan programs that fit the needs of the individual borrower and work to find competitive rates.
The broker will look to multiple lenders for programs that fit the individual needs of the borrower, including FHA, VA, USDA, and conventional loan options, and then they will compare rates and point out differences in terms offered by the various lenders.
Cross says, “Banks have a large menu of products — checking accounts, savings accounts, small business accounts, safe deposit boxes. And one of the items on that menu is home lending. They have to do a little bit of everything.”
By contrast, mortgage brokers, along with direct lenders, only focus on home loans. They are specialists in that field.
One particular perk of using a mortgage broker is that a mortgage broker will gather your financial details once and use it to apply to multiple lenders on your behalf. This could help save time, since you only have to fill out paperwork once. Once you decide on a loan, the broker will then see the transaction through to the finish line.
What doesn’t a mortgage broker do?
To be extra clear, a mortgage broker is not a lender. They don’t underwrite your loan; they will not be the ones to actually give you the funds for your home. They will work with the underwriting department at the lender of your choice, and they will help clarify the process for you, but they do not have the power to give you any money.
How are mortgage brokers paid?
Typically, the lender will pay the broker an origination fee for the broker’s services, usually a percentage of the purchase price. One percent to two percent is standard, though lower origination fees do exist. Because mortgage brokers work on a commission basis, they are motivated to get your loan closed.
Sometimes homebuyers pay the broker fee at closing, but sometimes the lender will provide a credit that ultimately results in no cost to the buyer. As you’re searching for a mortgage broker, be sure to clarify who pays each fee and how it will be collected.
One thing to keep in mind when it comes to the cost of using a mortgage broker: As with anything in the world, if there are more hands touching a process, more people are getting paid.
Your mortgage broker may get paid directly by the lender, but that lender is likely to charge their own fees for underwriting and funding your loan. And rest assured, the cost of your mortgage broker is being borne somewhere, so pay close attention to your rate; it’s possible your rate will be slightly higher than if you went directly to a bank or direct lender for a similar loan.
How can you find a good mortgage broker?
The best way to find a good mortgage broker is through a personal referral. As with any profession, there are some mortgage brokers who will work harder for you than others. If a friend or relative has had a good experience with a certain mortgage broker, that’s a great place to start.
You can also ask your real estate agent for a mortgage broker recommendation. They’ve likely crossed paths with several mortgage brokers and will know which ones have eased the closing process for their clients. Sometimes real estate firms will have an in-house mortgage broker as a part of their services, though you’re in no way obligated to work with that individual.
Finally, you can search for a mortgage broker on your own with a little bit of research. Mortgage brokers are licensed and regulated by the state, so verify their good standing on your state’s licensure web page or check the Nationwide Mortgage Licensing System & Registry.
It’s also a good idea to read reviews and testimonials. And if you really want to test a mortgage broker’s worth, locate what you think is a decent rate for a mortgage loan on your own first. A mortgage broker should be able to beat whatever you find — otherwise, you don’t need to use one.
What are the pros of using a mortgage broker?
Using a mortgage broker helps to streamline the home loan process for you. You get to compare multiple loans while only going through the motions of gathering your financial information once. And let’s face it, filing mortgage application paperwork only once sounds pretty fabulous.
Some lenders will only work with mortgage brokers, which means that by having one on your team, you get access to opportunities that wouldn’t otherwise be available to you directly. Cross says that a mortgage broker typically works with 15 or more lenders, which means they may have the ability to tailor your loan more specifically to your needs.
Similarly, mortgage brokers can also help find viable options for buyers in interesting or unusual situations. Homebuyers with poor credit, those who are self-employed, or those with seasonal income might benefit from a mortgage broker’s experience. Because they’re working within a well-established pool of lender contacts that make the full spectrum of loans, they can sometimes find creative solutions to trickier mortgage situations.
Having a mortgage broker on your team can help when it comes to closing, too. If one loan falls through, a mortgage broker can often help you obtain another quickly.
What are the cons of using a mortgage broker?
First of all, some mortgage brokers have more access to loans than others.
Sanchez explains that mortgage brokers must be properly vetted by lenders. Therefore, some have more connections than others. Plus, as with any industry, some mortgage brokers are more trustworthy and will work harder than others. You can combat this concern with good research and referrals.
Cross mentions that her industry is slammed between June and August. So during that time you may experience delays in service due to brokers juggling a lot of loans at once.
If you’re concerned about timing or any other aspect of using a mortgage broker, remember that you can choose to pursue mortgage loan options on your own.
To go back to the travel agent comparison, you can always book your own trip. Research direct lenders, banks, and credit unions that will work with you directly. These lenders that work directly with the borrower often carry a full product suite to meet the needs of most borrowers, and because you are eliminating the middleperson, their rates and fees are very straightforward and competitive.
It might take a bit more effort on your part (in terms of paperwork and research), but taking that extra time helps some travelers — and homebuyers — feel more in control.
Sanchez recommends using the online approval process with HomeLight Home Loans, saying it’s a quick and easy process for homebuyers who wish to work directly with a lender.
While going with a mortgage broker is ultimately a personal decision, Cross reminds buyers: “There are certain things that you don’t want to negotiate with in your financial life, and one of them is the largest purchase you’ll probably ever make.”
Talk with your real estate agent to help you determine if working with a mortgage broker is right for you and always make sure you are working with a licensed loan originator, whether they work for a broker or a lender, whose job is to find you a great mortgage to meet your needs.
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