What Is a Mortgage Broker?

What does a mortgage broker do?

A mortgage broker works as an intermediary between you as the buyer and the lenders, and can introduce you to various loan products at different financial institutions. Brokers are different from loan officers, who work directly for a bank or lender.

The benefit to you is that a mortgage broker often has connections to different types of loans for various circumstances. They can often access loans for people with non-W-2 employment, lower credit scores and various other financial positions. Brokers also have connections with lenders with a range of interest rates.

Mortgage broker vs. lender

You might assume that when buying a home you need to go directly to a bank or financial institution to get a mortgage, but this isn’t the case. Instead, you can go to a mortgage broker.

A mortgage broker helps connect buyers with lenders.

There are differences between going to a mortgage broker and going directly to a mortgage lender. A lender only has access to loan products offered through its financial institution. If you have a very straightforward loan, this might be fine. However, a mortgage broker can introduce you to many loan products that might better suit your needs.

Fees at a lender might be lower than with a broker; however, shopping around for a loan by using a broker lets you compare offerings and rates from different companies.

Mortgage broker vs. loan officer

If you decide to go directly to a mortgage lender, you will likely work with a loan officer. A loan officer shows you loan products from one financial institution, while a mortgage broker has access to many mortgage loans with different terms and interest rates.

Other than the loan programs they have access to, their jobs are very similar. They will both ask you to provide your personal information, including income, and everything needed to complete a loan application. If you have a steady income and good credit, it might be best to work directly with a loan officer. If you want to shop around for different interest rates, a mortgage broker is a good option.

Working with a mortgage broker

If you decide to work with a mortgage broker, you’ll need to provide certain documents to see what loan products you qualify for. It’s important to understand not only what you need to provide, but also what questions you should ask and how to negotiate with a broker.

What information do you need to provide a mortgage broker?

If you decide to work with a mortgage broker, they will ask you to provide several things, such as:

• Income verification, including a W-2, pay stubs, tax returns and information about alimony or child support payments
• For self-employed workers, two to three years of tax returns, Form 1099 documents and profit-and-loss statements (brokers usually ask for these)
• Asset and debt information, including retirement/investment account statements, bank statements and a gift letter if gift funds are being used to purchase the home
• Information so the mortgage broker can verify your credit score and payment history through a credit report
• Information about any bankruptcies or foreclosures and utility or insurance payment history (if you don't have a credit history)

Keep in mind this is not an all-inclusive list, and the broker might require additional documentation to process a loan application. These documents are used to determine the most appropriate lender and type of loan program for your mortgage loan.

How to negotiate with a mortgage broker

When you’re working with a mortgage broker, it is possible to negotiate things such as the borrower fee, lender commission and other fees.

The difference between a borrower fee and a lender fee is who pays the broker. This amount is included in the Loan Estimate. A borrower fee is paid by the borrower and is usually rolled into the closing costs. If the mortgage broker is being paid by the lender, the lender sometimes tries to recoup that cost by increasing the mortgage rate for the borrower. Discussing these fees is essential when negotiating with a potential mortgage broker.

You can also ask about hidden fees; however, in 2010 the Dodd-Frank Act was enacted to prevent lenders and brokers from using fine print that might mislead borrowers.

What are the most important questions a first-time buyer should ask a mortgage broker?

If you are a first-time buyer, consider asking these questions to a mortgage broker to see if they’re the most qualified to help you find a loan:

• Do you have any references or reviews from previous clients?
• How many years have you been a broker?
• What are the fees I will pay for working with you?
• What lenders do you work with?

You should also ask about the specific mortgage products the broker shows you from different lenders, including:

• What is the interest rate and annual percentage rate (APR)?
• What are the closing costs?
• How much is the down payment?
• Is there a prepayment penalty if I pay my loan off early?
• How much is the mortgage insurance?
• What type of mortgage loan is best for me?

Mortgage broker pros and cons

There are pros and cons to working with a mortgage broker. If you have good credit, you might want to work directly with a lender to save on the fees you would otherwise pay to a mortgage broker.

However, the time savings and greater number of loan options make working with a broker attractive to many homebuyers.

Mortgage broker benefits

Benefits to working with a mortgage broker include:

• Access to a variety of loan products

  A broker has access to a wide variety of mortgage products from different lenders. A representative works with you to look at a variety of lenders and find the best loan product for you. This can help you find the lowest interest rates and best mortgage to fit your needs.

• Help for first-time homebuyers

  Working with a mortgage broker can be especially helpful if you are a first-time homebuyer. Buying a home and finding a mortgage is a complex process; a broker can help walk you through it step by step.

• Saves you time and stress

  Researching different lenders on your own can be quite a task. Having a broker do this for you can save a lot of time and stress. Brokers also have much more knowledge than the average homebuyer about this subject and can help you compare your choices.

Mortgage broker drawbacks

Working with a mortgage broker is not necessarily in the best interest of every homebuyer. Here are a few cons to be aware of when working with a broker:

• Fees and commissions

  When you work with a mortgage broker, you will pay a fee or commission for services. Even if you do not pay it directly to the broker, the lender might add the fees to your closing costs.

• No loan approval

  It's the lender or bank that will approve your home loan — not the broker. Working with a broker does not change the requirements each lender has to qualify for a loan.

• Broker relationships with lenders

  Some brokers might have favorite lenders to work with. Make sure the broker you're working with is independent. Ask when you’re meeting with potential brokers how they make their lender recommendations.

Ultimately, whether it’s more beneficial for you to work with a mortgage broker or with a direct lender or loan officer depends on your situation. Consider the type of loan you need, if you’re a first-time homebuyer and your credit score. You can always interview a few brokers to see if the benefits they offer are worth the extra cost.

How to choose a mortgage broker

If you decide that working with a mortgage broker is right for you, take the following steps to find the best broker for your needs:

• Research different brokers. Ask for referrals from friends and family. You can also check review sites to see what feedback other clients offer.
• Make note of brokers’ credentials. This includes continuing education, involvement with local mortgage professional associations and up-to-date licensing.
• Speak with brokers directly. It’s always a good idea to talk directly with a potential broker to get an overall feeling for their ethical and professional standards.