A home is the biggest, most exciting purchase most people will ever make. It might be the most nerve-wracking, too, because obtaining a mortgage and closing the loan can be a lengthy, complicated process, especially for a first-time homebuyer.
This is where a mortgage broker can help, from finding the best interest rate and lowest fees, to completing an application, to closing the loan smoothly and on time. With the COVID-19 pandemic adding more wrinkles to the mortgage process, working with a mortgage broker to navigate today’s market can be a wise move.
What is a mortgage broker?
A mortgage broker is a go-between who matches borrowers and mortgage lenders. If you’re buying a home or refinancing, a broker can help you find the best mortgage for your needs and situation.
“A mortgage broker not only helps you get the most competitive rates and pricing, they also help make sure your loan is a good match with the particular lender,” explains Andrew Weinberg, principal at Silver Fin Capital Group in Great Neck, New York. “They can quickly determine the best lender for each individual borrower.”
Part of a mortgage broker’s job is to “do the math” and tell a borrower what size mortgage they could qualify for, says Rick Masnyk, a branch manager at Network Funding in North Smithfield, Rhode Island.
Importantly, a mortgage broker has access to more lenders and mortgage products than a bank loan officer, who is limited to the mortgages provided by the bank.
A mortgage broker is not, however, a lender of mortgage funds. Brokers simply originate the loan and place it with a lender, who then disburses the funds at closing.
How a mortgage broker works
A mortgage broker works with everyone involved in the lending process, from the real estate agent to the underwriter and closing agent, to make sure a borrower gets the best loan for their situation and that the loan closes on time.
A broker can work independently or with a brokerage firm, and, among their services, researches loan options and negotiates with lenders for their clients. A broker might also pull credit reports, verify the client’s income and expenses and coordinate all of the loan paperwork.
Many brokers have access to a powerful loan-pricing system, as well, that helps price your loan across many lenders at one time, speeding up and streamlining the process.
How does a mortgage broker get paid?
Mortgage broker commissions or fees are usually paid by the lender after the loan has closed, so working with a broker should not affect how much your loan will cost. The broker’s commission typically ranges from 0.50 percent to 2.75 percent of the loan principal. Federal laws cap fees at 3 percent and also require that they not be linked to the interest rate on a loan.
“Most brokers do not charge the borrower anything at all in most scenarios,” says Weinberg. “The compensation paid to the broker by the lender does not add a penny to the borrower’s closing costs, just like the compensation paid by the big banks to their…loan originators doesn’t add to your closing costs.”
“Prior to the  economic downturn, consumers didn’t see how much a broker got paid, but in today’s mortgage climate, the cost of the loan is charged to the borrower and the lender purchasing the loan provides a credit equal to that cost, resulting in no cost to the borrower,” adds Masnyk.
That’s not to say you never have to pay a fee — some brokers do charge them to borrowers. In these cases, it’s a flat fee, usually 1 percent to 2 percent of the loan principal, and it can be paid in a lump sum at closing or rolled into your loan.
Mortgage broker vs. lender vs. loan officer
The difference between a mortgage broker and a lender is that a broker doesn’t lend the funds for mortgages. Rather, brokers originate and close mortgages between lenders and borrowers. Brokers partner with a variety of lenders, including commercial banks, credit unions, mortgage companies and other financial institutions, and can work independently or with a brokerage firm.
In contrast, a loan officer is employed by a bank, credit union or other lender and is limited to providing the loan products their employer offers. Generally, loan officers assess borrowers and either authorize or recommend approval for loans.
A loan officer might not be as knowledgeable as a broker, either. That’s because, while mortgages are a broker’s daily bread, a loan officer could also be handling auto, boat and personal loans, so may not be as focused on this one area like a broker is.
In addition, a borrower who gets a mortgage straight from a commercial bank could end up paying more because of the bank’s overhead. A broker might be able to get you a loan with a better rate from the bank’s wholesale division instead.
Still, banks often contend that they’re a better go-to for a mortgage, especially for borrowers who have been with the same bank for a long time, and that they’re more secure because they have heftier portfolios.
Pros of working with a mortgage broker
- A mortgage broker may be able to get you a lower interest rate and lower fees. Brokers have access to a broader assortment of loans and lenders and may be able to find a better deal than you could get for yourself.
- A broker can save you time. Brokers can do all the research on rates and fees; they negotiate for you and keep the mortgage process on track.
- A broker can save you from making a big mistake. Brokers can help you avoid pitfalls because they know the mortgage industry, the differences among lenders and the twists and turns in the mortgage process.
- A broker can find the right lender for tricky situations. If your credit history isn’t great or the property you’re buying is unusual, a broker can find a lender who has more flexibility with credit scores and down payment amounts or who specializes in certain types of properties.
Cons of working with a mortgage broker
- Not all lenders work with mortgage brokers. Brokers may not have access to all loan programs at certain financial institutions.
- You might have to pay the broker. Before hiring a mortgage broker, ask how they get paid. Usually, the lender pays the broker fee, but sometimes the borrower pays.
- There is potential for conflict of interest. If a lender pays a mortgage broker a commission, the broker could favor that lender and you might not get the best deal available.
Questions to ask a mortgage broker
Before you get too far into the process with a mortgage broker, ask these key questions:
- How much do you charge and who pays your fee? The lender usually pays the mortgage broker, but sometimes the borrower pays. Broker fees can show up on the loan estimate or closing disclosure in several ways, so get clear on this ahead of time to avoid surprises at closing.
- Which lenders do you work with? Most mortgage brokers have a stable of lenders they work with, and not all brokers work with the same lenders. If you’re eyeing a VA loan and the broker doesn’t work with VA lenders, for instance, that broker is likely not the best fit for you.
- How much experience do you have? As a rule of thumb, choose a mortgage broker who has been in the industry for at least three years. If you’re interested in a specific type of loan, ask how much experience the broker has with those loans, as well.
- Are you licensed to do business in my state? You can check to see if a mortgage broker is licensed through the Nationwide Mortgage Licensing System and Registry.
- Do you have references? Ideally, you found your mortgage broker through a reference from a friend, relative or co-worker, but if not, it’s smart to check references. Ask for names and contact information of several recent clients, then ask them about their experience with the broker. Would they do business with that broker again? Did the loan estimate have accurate information? Were there any issues closing the loan?
- How do you handle rate locks? A rate lock guarantees you the interest rate you’re quoted for a certain amount of time, regardless of whether rates go up or down. A typical rate lock lasts 30 days or 60 days. If the lender permits, you can add a “float down,” which guarantees you a lower rate if rates fall during your lock period. Ask your broker for a loan commitment or preapproval letter from the lender. It should specify the interest rate and points, the date the rate was locked and when the lock expires.
How to choose a mortgage broker
Finding a mortgage broker requires a bit of homework. You can start by asking your real estate agent, friends and family for referrals. Read online reviews and check with the Better Business Bureau for complaints, as well.
Ultimately, the burden is on you to find the best mortgage provider, whether through a broker or loan officer, and to shop around for the best rate and lowest costs.
Should you work with a mortgage broker?
There’s no reason not to work with a mortgage broker, Masnyk says. Borrowers who use a mortgage broker get the benefit of a more personal experience and having a licensed professional do the legwork for them.
“Working with someone you can see face to face and/or someone your Realtor has used in the past and trusts is always a great source,” Masnyk says.
With the pandemic changing the mortgage market, having a knowledgeable ally like a mortgage broker might matter even more now, notes Weinberg.
“We have seen the large banks pull back on their product offerings and tighten up their underwriting guidelines, particularly on the jumbo loans,” Weinberg says of the fallout from the pandemic. “In addition, most lenders have added underwriting guideline overlays. Those overlays highlight the importance of an experienced mortgage broker with a large network of wholesale lenders.”
It never hurts to shop around with several lenders to see if a broker is really offering you the best deal, however. Bankrate’s mortgage calculator can help you compare offers.