How does a mortgage broker work?
Mortgage brokers are just like the name sounds, they broker a mortgage between the bank and you.
Mortgage brokers should not be confused with Loan Officers. Loan Officer is a license designation and is required to offer loans of any type. All Mortgage Brokers are loan officers, but not all Loan Officers work for Mortgage Brokers. This an important distinction, since there are some lenders that are Branch Offices for major lenders and not true brokers. More on this later.
What makes a Mortgage Broker a true Broker?
Mortgage brokers work with multiple lenders. They do this to find the best rates and loan programs. You see, not all lenders want all loans, what is good for one lender might be unacceptable for another. These extra rules are referred to as overlays and each lender has their own set of overlays. For example, some lenders will not accept anyone with a credit score below 620 while others can go as low 580.
Some companies are really Branch Offices for a lender, these are not true brokers. This distinction is important because these branch offices (also called correspondent lenders) are bound by the overlays of the lender they represent. This limits what type of loans they can do and what type of customers they can approve for a mortgage.
Branch offices will try to explain how they have direct access to underwriters and brokers don’t. While this might be true in some cases, being friends with the underwriter will not make them bend the rules and approve your loan.
All loans are sold on secondary markets (Wall Street) and are subject to post closing audits. An oversight or mistake by the underwriter will be noticed by the auditor and force the lender to buy back the loan.
If a branch office receives a negative from the underwriter, the loan is DOA. If a broker receives a negative from an underwriter, he can switch the lender to one that does not have that particular overlay.
So, when shopping around ask is they are brokers or a branch office.
Mortgage Brokers vs Banks
You might think that banks would always beat mortgage brokers on rates, after all, they are the bank and are lending directly, right? Well no, this is not true. Brokers are cheap labor for banks, they are not on their payrolls, so they represent $0 overhead for them. They much rather get business from brokers.
Brokers fill in niche markets that would be very expensive for the banks to service directly. There are brokers that work Hispanic communities, other specialize in VA loans, and others work with difficult clients like the self-employed.
Some examples of loan niches:
- Self Employed
- Investment Properties
- Fix & Flip
- Down Payment Assistance
- Hard Money
- Foreign Nationals
These niche markets are where mortgage brokers excel. Brokers can offer very specialized services that would otherwise be overlooked by big banks.
Who pays the mortgage broker?
The buyer or the lender pays the mortgage broker. They receive a fixed percentage amount that is based on the loan amount. This is usually around 2%.
The payment is made at closing and is part of the closing costs. This can be avoided by having the broker gets paid by the lender. This is referred to as Lender Paid. The way the lender accomplishes this is by raising the rate on the loan.
Buyers usually pick the Lender Paid option, since their monthly payment goes up by very little. You as the buyer can choose whatever method is most beneficial to you most of the time. There is an exception to this rule, and it is too long to explain in this article.
Watch out for hidden fees
Here is where the buyer must be extra vigilant. A lot of lenders and brokers will line their loans with fees. Not all of these fees are mandatory and vary from lender to lender.
They have application fees and processing fees. Always ask the potential lender that you are working with about these fees and whether they have them or not and how much they are.
These fees can add thousands of dollars to your closing costs and make the difference on whether you can buy or not a home.
Read the Loan Estimate (LE).
When you supply these six points of information to a lender, they have 3 days to give you a Loan Estimate (LE). The LE is an estimate of the costs that you will incur in when buying a home.
Six points of information
- Consumer’s Name
- Monthly Income
- Social Security Number
- The Property Address
- An Estimate of the Value of the Property
- The Loan Amount
Check out the first section labeled “A”. Here is where you will see any fees or charges that the lender and the broker are charging you. Buyer paid broker’s fees show up here.
While most lenders and brokers charge about the same, some do not so shop around for fees.
No closing cost loans
These sound great, but they are not free. Fees are all built into the interest rate. This is a great option if you do not have all the money required for closing costs.
You can ask any lender for this, it is called Lender Credit. It can only be used for closing costs, your down payment and the prepaid must come from you.
Ask and ask again, there are no stupid questions and shop around. Just because one lender turned you down doesn’t mean that you do not qualify.