Mortgage brokers are “matchmakers” between borrowers and lenders. Brokers gather documents and information about borrowers, create a loan file, figure out which mortgage program is the best fit, then find a lender that offers the best terms.
In a nutshell, mortgage brokers follow a relatively consistent pattern that looks like this:
- Identify the borrower’s needs (size and location of home).
- Evaluate the borrower’s financial situation (credit history and score) and borrowing capacity (employment, income).
- Recommend suitable mortgage programs for which the borrower and property are both eligible.
- Shop the market to find the best loan terms.
To further understand how mortgage brokers work, let’s take a look the broader mortgage market and the players involved. There are three main types of institutions that make home loans: banks, non-bank lenders and brokers.
Banks (Depository Institutions)
Banks are depository institutions. Meaning, you can open checking and savings accounts and deposit money. You know banks by name, companies like Wells Fargo, Bank of America and Chase. You may also hear them called “retail banks” as most have physical locations, brick-and-mortar stores.
Checking and savings accounts are not big money makers for banks; those products are essentially loss leaders to get customers in the door. Banks then look to build on those relationships by cross-selling, or steering customers to more profitable products like mortgages, credit cards, investments (stocks, bonds, mutual funds, etc.), auto loans, student loans and business loans. I mean, they’ll still make tons of money by charging brutal ATM fees, but other financial products are more of a “home run” for them.
Because banks don’t focus exclusively on home loans, banks usually carry the fewest number of mortgage products compared to other types of operators (such as non-lenders and brokers, described below). The mortgage programs offered retail banks typically have the most restrictive underwriting guidelines. They’re not looking to serve the widest possible audience like borrowers with average or below-average credit.
Non-bank Lenders (Non-Depository Institutions)
Non-bank mortgage lenders do not offer savings and checking accounts to customers. They don’t pitch credit cards, insurance products or mutual funds. Instead, mortgage lenders focus on one thing: home loans. Many non-bank lenders have retail locations. Increasingly, non-bank lenders like Quicken Loans or Home Depot conduct most of their business online (e.g., digital mortgages).
Mortgage lenders make loans to consumers with capital (money) sourced from a variety of places. First, they can get money directly from institutional investors or hedge funds (Wall Street). Second, they might get capital from wholesale divisions of large banks (e.g. Bank of America). That’s right, your B of A loan officer and your online mortgage lender might be drawing water from the well, so to speak.
Non-bank lenders typically offer a broader number of loan products than depository banks. They may have more latitude on interest rates, too. While non-bank lenders have more options than depository institutions, they may not offer as many choices as the next type of resource: mortgage brokers.
Mortgage brokers independently of banks and non-bank lenders. Brokers focus exclusively on mortgage origination (finding customers, starting loan applications and following through to closing). With a borrower’s loan file assembled, mortgage brokers can shop the loan among wholesale divisions of banks or with non-bank lenders to find the best available mortgage program and terms (e.g. interest rate). Brokers have the widest selection of programs from which to choose.
The employees that work under a mortgage broker, folks with whom you’d most likely interact, usually have a title like loan officer or advisor or consultant.
Mortgage Broker Duties and Responsibilities
For Mortgage Brokers, Customers Come First
Because brokers have access to a wide range of lending channels, they can pick and choose among a variety of mortgage products and lenders at will. This environment creates a healthy competition for a broker’s business, thus benefiting the broker’s customers; lots of choices and competitive rates.
Mortgage brokers focus a lot of attention on customer service because they depend heavily on word-of-mouth referrals from happy customers. A good loan advisor (at any institution, not just a brokerage) will educate customers, guide them through the home loan process and explain the myriad of legal disclosures such as the loan estimate.
Doing a good job for customers helps mortgage brokers build their brand, not a bank’s brand. Big banks don’t have as much pressure to provide good service; they can absorb bad press because they have millions of dollars to throw at television ads to clean up their image and convey positive messages about their brand – even if they are ripping you off.
Mortgage Brokers Serve More Than One Kind of Customer
Brokers have relationships with multiple lenders, giving them the opportunity to find the best loan product based on a borrower’s financial profile. They can service more than one type of borrower, too. For example, a broker can help a borrower with a short-term loan on a fixer-upper investment property. Banks won’t touch these kinds of deals.
Brokers will also take on more “difficult” lending situations, meaning they’ll try to help borrowers with lower credit scores find a mortgage product and a lender that accepts higher-risk deals.
Brokers (and many non-bank lenders) will be able to help seniors with a reverse mortgage. Depository banks rarely offer specialty products like reverse mortgages. Banks are also not known as being particularly savvy with less-common government programs like USDA loans.
Brokers Must be Licensed and Follow the Law
Loan officers at non-bank lenders and mortgage brokers must obtain and maintain state and national professional licenses. Loan officers at depository banks are not required to take any formal education nor take national and state licensing exams. How weird is that? It sounds like banks have better lobbyists, huh? Meaning, there’s a loophole for bank employees to be less regulated.
At any rate, brokers and non-bank lenders must be licensed in each state in which they wish to do business. To be licensed, loan officers take a specified number of education credits (hours), pass a national exam as well as a state exam(s).
Brokers must clear a criminal background check and provide fingerprints that are cross-checked by the FBI. Loan advisors must pay initial and ongoing license fees each year. They must keep abreast of current lending laws via continuing education credits each year.
Mortgage Brokers Keep the Loan Process Moving Forward
Mortgage brokers and their support teams keep deals moving forward. The order credit reports and property appraisals at the appropriate time. They’ll communicate with you and your real estate agent each step of the way. They’ll be proactive – looking for potential problems well in advance and helping steer the ship back on course.
Mortgage Broker FAQs
How does a mortgage broker get paid?
Brokers charge an origination fee, usually 1% of the loan amount. Borrowers pay that fee at closing. In the case of a “no closing cost loan,” the origination fee is rolled into the loan amount in exchange for a slightly higher interest rate on the mortgage note.
What are the advantages of working with a mortgage broker?
Brokers offer a wider selection of mortgage products because they have access to more lending sources. They are not “one-size fits all” like big banks. And like most small businesses, brokers work hard at customer satisfaction. They know the importance of word-of-mouth. They can’t gloss over mediocrity with large advertising budgets.
What are the advantages of working with a mortgage broker?
Mortgage brokers disclose their origination fees right on the loan estimate. You can see exactly how much they charge to help you with your home loan. Sometimes, fees are hard to swallow. However, brokers have access to wholesale lending sources and can make up for those fees with a lower interest rate, saving you money over time.
How do I pick a mortgage broker?
The same way you’d pick any professional service provider. You should be comfortable with your loan advisor’s communication style – answers to your questions should be clear and complete. Check their reputation online, like reviews like Yelp or their Facebook page. Lastly, make sure they are licensed! Loan advisors should be able to provide you with a link to their license(s) stored by the Nationwide Multi-State Licensing System (NMLS).