What Is a Mortgage Broker? Job Description, License, and How to Find the Best Mortgage Brokers Near You
Borrowers and lenders are not the only parties majorly involved during the mortgage process.
There is sometimes an additional third party who makes sure the entire process runs smoothly: the mortgage broker. Mortgage brokers are the intermediaries who arrange loans for the purpose of buying a house on behalf of others.
They do not fund the mortgage themselves—that is the role of the lender.
The concept of a mortgage broker may sound a bit redundant to some readers. Aren’t banks capable of (and have enough of an incentive to) sell their own credit products, such as loans?
The truth is that the mortgage market has become increasingly competitive. With more people able to buy a house and more financial institutions offering mortgages, there is more competition to snag those would-be homeowners, making the job of mortgage brokers more prominent.
See Also: We Buy Houses Reviews | Is This Firm Legit? Details on Companies That Buy Houses
Do I Even Need a Mortgage Broker?
Such an explanation of a mortgage broker may still be unsatisfactory. Sure, they help banks, but what’s in it for the borrower?
Well mortgage brokers play an important role in helping potential homeowners find a mortgage that is suitable for them, in addition to helping with the facilitation of all the other details involved in the process.
For instance, if a borrower is looking for a specific mortgage with a certain range of interest rates, a mortgage loan broker helps them shop around for the right product.
What Do Mortgage Brokers Do?
The level of regulation on mortgage brokers varies by country. In the United States, this regulation varies from state to state. Generally speaking, a mortgage broker points consumers in the direction of banks offering the kind of mortgage they’re looking for and provides advice suitable for that individual’s life and financial circumstances.
Additionally, mortgage brokers assist in completing and filing all the pesky paperwork and applications associated with applying for any kind of loan.
This is perhaps the feature of a mortgage broker’s job that everyday consumers will identify with and appreciate the most. They are also involved in refinancing mortgages if that is the service a consumer is looking for.
In order for a mortgage broker to determine the best loan for a client they gather the following basic documentation:
- Income/assets
- Employment records
- Credit report
Don’t Miss: Redfin Reviews | What You Should Know about Redfin (Real Estate)
All-in-One Change Management Tools
Top Rated Toolkit for Change Managers.
Get Your Change Management Tool Today...
These are the same kinds of documentation a retail bank would ask for. They allow the mortgage broker to determine what kinds of loans you are likely to be approved for.
Mortgage brokers also provide their clients with advice on which mortgage options are best suited for them. They help aspiring homeowners determine what kind of loan they should get, what interest rate is most suitable for their income, and what their loan-to-value ratio should be.
A loan-to-value ratio is essentially the value of the house divided by the amount of borrowed money used to buy it. The remaining money represents the person’s stake in the house.
The lower the loan-to-value ratio, the more equity a person has in their home, and the lower their interest rate will be. Mortgage brokers help determine what that ideal number should be.
A lower loan-to-value ratio also allows a buyer to avoid pricey private mortgage insurance, which is essentially a safety net in case they cannot afford to make their payments. Typically, so long as buyers are able to put down 20 percent, they are not required to buy mortgage insurance. This is one element a responsible mortgage broker will disclose to their clients.
A mortgage broker then submits all the paperwork to the bank of choice in order to secure a loan. When mortgage brokers are involved, individuals have minimal to zero interaction with the bank. Their mortgage loan broker is the go-between who communicates with both parties and ensures everything goes off without a hitch.
What Are Mortgage Broker Fees and How Do Mortgage Brokers Make Money?
Mortgage brokers make their money either through a loan origination fee or through yield spread premium (YSP is largely banned now and mortgage points used). Both seem complicated, but they are simpler than they sound.
An origination fee is the fee a lender charges for processing an application. It is a percentage of the amount the application is being processed for. In this case, it is the mortgage broker who is processing the application on behalf of his or her client, which means they receive the origination fee.
Alternatively, mortgage brokers may receive their fee via a yield spread premium (technically, this is no longer allowed). A yield spread premium is the amount of money made over the long term when a client opts to acquire a no-cost mortgage.
A no-cost mortgage means that the upfront costs associated with acquiring a mortgage are absorbed by the mortgage in the form of a higher interest rate.
Alternatively, a buyer may opt to have only a fraction of the upfront or closing costs be absorbed. The clients still pay, but over the long term. The mortgage broker receives his fee from this spread as incentive for selling a mortgage with a higher interest rate.
Related: What Is a Mortgage Insurance Premium? | What You Should Know about This Mortgage Insurance
Mortgage brokers established a nefarious reputation in the aftermath of the 2008 financial crisis when the industry’s predatory lending practices came to light. Receiving payment through the yield spread premium isn’t necessarily illegal, but it can be exploited by so-called professionals out to make extra money.
The original idea behind the yield spread premium was to save home buyers up-front fees and still allow the mortgage broker to receive a commission.
But mortgage brokers only receive money from the yield spread premium if the mortgage they sell their clients is above their par rate, which is the lowest possible interest rate they can get. An individual would take the higher interest rate to eliminate or reduce the up-front costs.
Some mortgage brokers took advantage of the system by encouraging borrowers to opt for the higher interest rate, even when there was no real benefit to them. Even if there were a benefit, the rate they were encouraged to take would be way above the necessary amount.
Unfortunately, they preyed on many aspiring homeowners with minimal understanding of the lending process, using slick sales tactics to convince them that this was the right option.
We now know how this all ended. Many of the people who were sold these mortgages simply couldn’t afford to make payments and stopped paying altogether, the securities these mortgages backed became duds, and the credit bubble that had developed popped, sending the global economy into a free fall.
Mortgage Brokers Now Face Stricter Regulations
Mortgage brokers are now more strictly regulated so that their desire for personal profit does not supersede their responsibility to their clients.
The mortgage and credit crises resulted in a number of changes at the federal level. Most notably, while a mortgage broker may still continue to receive compensation based on the entire loan amount through mortgage points, yield spread premiums have effectively been banned.
The federal government also implemented rules that protected borrowers by prohibiting “double dipping.” Lenders are no longer able to charge an origination fee while also profiting indirectly through a higher interest rate.
Once upon a time, brokers and lenders could technically profit from both. While it wasn’t illegal then, it was still deceptive.
The same applies for mortgage broker fees. Mortgage brokers must now choose whether they want to accept a fee from the lender or the borrower. They cannot take a cut from both.
Is There Such a Thing as a Mortgage Broker License?
While there is federal legislation regarding mortgages, mortgage brokers are typically regulated at the state level. Furthermore, each mortgage broker must be licensed by the state in which they practice.
To obtain a mortgage broker license, aspiring brokers must pass the SAFE Mortgage Loan Originator Test, which includes both a national and a state component. Continuing education is also required to stay up-to-date and keep the license valid.
Popular Article: Private Mortgage Insurance: What You Need to Know about PMI Insurance
Why Use a Mortgage Broker and How Do I Even Find a Mortgage Broker?
If you’re an especially proactive person, you may be wondering, “Why use a mortgage broker?” Your adult life has been spent filling out paperwork, and the Internet provides you with a number of mortgage comparison tools.
Like any decision related to finances, why you should use a mortgage broker depends largely on your situation. On the one hand, obtaining a mortgage directly from the lender may result in the bank absorbing some of the origination fee. A mortgage broker would not do this since this fee is one of the main ways they make their money.
On the other hand, mortgage brokers are plugged into a vast network, which means they can provide more options for borrowers. This is especially useful for those planning to provide a lower down payment or individuals with poor credit scores who have a high likelihood of pricey mortgages.
Then again, someone with a high credit score and a large down payment could also benefit from using a mortgage broker who may find an even better deal than the great ones they are most likely to be offered.
Research is also required on the part of buyers to determine whether they will get a better rate using a mortgage broker or going straight to a lender. It’s also important to ask for clarification throughout the process to ensure you are being treated fairly.
While a majority of mortgage brokers are legitimate, the dark side of the profession means that there is more incentive to push riskier mortgages on consumers than there is for retail banks.
Read More: How to Get Rid Of PMI Mortgage Insurance | Ways to Get Rid of PMI
Free Wealth & Finance Software - Get Yours Now ►
How Do You Find a Mortgage Broker?
Even after deciding you’d like to hire a professional, the next issue is figuring out how to find a mortgage broker. In 2013, it was reported that the National Association of Mortgage Brokers number of members had gone down to 5,000, a steep drop from 25,000 in 2006. This was due, in part, to the changes to the regulatory landscape.
While these regulations were put in place to protect consumers, naturally it has made it more difficult for individuals to find a mortgage broker.
Mortgage brokers are licensed at the state level, which means it’s more effective to run a search on “best mortgage brokers in Phoenix, AZ” for example, as opposed to a general search. There is no money to be lost in simply speaking to a mortgage broker since they do not make money until a mortgage is actually originated.
At the end of the day, if you do decide to go the mortgage broker route, the way to determine you have the best mortgage broker available is to come prepared with as much information as possible and see who is the most willing and able to answer your questions.
Luckily, the predatory mortgage brokers of the past have been weeded out with new regulations, but still aim to be critical of who you are trusting for financial advice.
Predatory mortgage brokers capitalize off of a consumer’s lack of knowledge about mortgage products. If a mortgage broker is unwilling to answer questions clearly or explain why they charge a certain fee, it may be a sign that this is not the professional for you.
You are your greatest protector of your money, and a hired broker should be ready to clear up any confusion. Be confident and be prepared.
AdvisoryHQ (AHQ) Disclaimer:
Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.