A mortgage broker doesn’t lend money; they’re not a financial institution. Instead, a broker acts as a middleman between prospective home buyers and loan lenders.[1] Working alongside a mortgage broker can help you conveniently access a broad range of mortgage loans, but there are downsides to keep in mind, too.
Read on to learn what a mortgage broker is, their pros and cons, and when it makes sense to use a mortgage broker vs. lender.
What is a mortgage broker?
A mortgage broker is a professional intermediary that leverages their relationships with various lenders to help buyers find a mortgage loan. Brokers are considered a type of mortgage loan originator and must be licensed by the National Mortgage Licensing System (NMLS).[2]
How mortgage brokers work
When you first work with a mortgage broker, they’ll gather your personal information and ask you questions about your loan needs, income, debt, and credit history. They might also request preliminary financial documents.
You’ll then be matched with various lenders within the broker’s network, based on your borrower profile and preferred loan details. The broker will walk you through your pre-qualified mortgage options, explain disclosures in layman’s terms, and answer any questions regarding the loan or process. They can also help you prepare supporting documents for a mortgage application and review your final application before submission.
The assistance of a broker comes at a cost. Brokers earn a fee or commission for their role. Depending on their arrangement with the lender, this fee might be paid by you or the lender. According to the National Association of Realtors (NAR), the commission is typically 1–2% of the loan amount.[3]
Pros and cons of using a mortgage broker
Although using a mortgage broker offers advantages, there are some caveats to keep in mind.
Pros
- Convenience: Brokers do the legwork by shopping for a loan on your behalf.
- Lender network: Brokers work with a broad network of lenders and have access to more loan products than you might find on your own.
- Potential savings: Brokers might be able to negotiate lower or waived mortgage fees.
Cons
- Broker fees: In exchange for their services, brokers are paid a commission. If your lender doesn’t cover this, you can pay the broker directly at closing or add the fee to your total loan amount.[4]
- Best deal isn’t guaranteed: Brokers aren’t obligated to find you the best deal, so it’s always worth getting your own offers from multiple lenders.
- Indirect lender contact: Since you’re not dealing with a lender directly, you’re forced to relay questions or counter-negotiations through the broker. This can be time-consuming and not ideal if you prefer getting answers straight from the source.
What is a mortgage broker vs. lender?
Understanding the difference between what a mortgage broker is vs. a lender can help you better decide which to use for your house hunt.
Mortgage brokers operate as a professional liaison between borrowers and multiple lenders. They help borrowers sort through an array of loan products and facilitate the loan application process for a fee.
Conversely, mortgage lenders are the entity that sets the loan’s terms and funds it. Lenders are commonly banks, credit unions, and mortgage companies. They earn money in a few ways, including by charging origination and closing fees and loan interest.
Meeting with a mortgage broker
Preparing a few details in advance can help your meeting with a broker go smoothly and reduce delays. Here’s what to have ready:
- Supporting documents: Gather pay stubs and tax returns as proof of income, existing debt and banking statements, and your credit reports.
- Your financing needs: Be ready to describe the type of loan you’re looking for (e.g. adjustable- vs. fixed-rate mortgage), whether you’re open to other loan options, your down payment amount, and your budget.
- Questions: Get transparency about how the broker is paid, their fees, the lenders in their network, turnaround times, and whether they’ll play a role in the loan transaction itself. This helps flag any competing interests.
Finding the right mortgage broker
A mortgage broker lines up prospective lenders based on home buyers’ needs. They gather all the necessary paperwork and negotiate between each party.
Going through a broker can help you cast a wide net when searching for financing, but be mindful of broker fees and any conflicts of interest. If you prefer having more control and speaking to lenders directly, a broker might not be a fit.
When searching for a mortgage broker, a good starting point is leveraging your real estate agent’s professional network. Agents can recommend preferred brokers or lenders that have successfully helped past clients secure a mortgage. Find a local real estate agent who can offer meaningful guidance today.