In short a mortgage broker does not fund your mortgage which means the broker does not directly provide the money for your loan. Instead, a mortgage broker works with numerous third party lenders and selects the lender and loan program that best meets your mortgage objectives based on your personal, financial and credit profile.
Does this mean the mortgage rate you get from a mortgage broker is higher?
Not necessarily. A mortgage broker is a retailer who works with wholesale lenders to offer loan to consumers. A broker compares multiple lenders in its network to find you the best mortgage terms possible, including the lowest mortgage rate. In some cases, the rate offered by a broker is comparable to or lower than the rate offered by a lender that funds its own mortgages (also known as a direct lender).
Mortgage brokers can offer competitive mortgage rates for several reasons. First, they compare loan terms from multiple wholesale lenders, which creates competition that leads to better mortgage rate pricing.
Second, brokers receive wholesale rates from their lender network. Even though the loan terms offered by a mortgage broker typically reflect a retail “mark-up”, they can still be attractive if the wholesale prices are favorable.
Finally, because mortgage brokers do not fund or service loans, their cost structure may be lower than a direct lender. Brokers can pass along this cost savings to you the borrower in the form of lower mortgage rates and lender fees.
Another benefit of working with a mortgage broker is that they may be able to offer a wider range of mortgage programs that better meet your financing needs. Because brokers work with multiple wholesale lenders they may be able to offer specialized loan programs, such as low down payment options, that a direct lender does not.
So if you are a borrower with unique circumstances that is interested in a niche loan program, your odds of finding the right program are better if you work with a mortgage broker than a direct lender that may have a more program offering.
Because a mortgage broker is not a direct lender, does that mean they charge higher fees?
Again, not necessarily. Mortgage brokers can adjust the lender fees they charge to be competitive with direct lenders. Additionally, brokers are compensated by the wholesale lender that funds the mortgage and they can elect to get paid less by the wholesale lender but offer you lower costs (or a lower mortgage rate).
Are you recommending that I only contact a mortgage broker when I shop for a mortgage?
No. We highly recommend that you contact at least five lenders when you shop for a mortgage, including different types of lenders. We are suggesting that a mortgage broker should be one of the multiple lenders you contact. Comparing mortgage proposals from different lenders puts you in the best position to find the most attractive loan terms.
The table below outlines the mortgage rate and fees for leading lenders in your area. Contact multiple lenders to find the lowest mortgage rate and fees. Shopping for your mortgage is the best way to save money on your loan.
What are the negatives of working with a mortgage broker?
Because a mortgage broker is not a direct lender they have less control over the loan approval process. Your application must meet the wholesale lender’s qualification requirements, which means there is an extra step to approve your mortgage. Because an additional party is involved, the mortgage process may take longer if you work with a broker.
Additionally, after your loan closes you make your payment to a different lender (or servicer) and if issues arise with your mortgage you contact that party as opposed to mortgage broker. For some borrowers this creates confusion and they would prefer to have a consistent point of contact for their mortgage.
Finally, just because mortgage brokers can offer competitive loan terms does not guarantee they always do. They have discretion over the mortgage pricing they offer you and may not offer attractive terms.
Review Mortgage Lender Options
This is why we always advise you to shop different types of lenders – including mortgage brokers, banks, mortgage banks and credit unions – for your loan. You never know what type of lender is going to offer the best terms and program for you. It could be a mortgage broker after all.
Use the FREEandCLEAR Lender Directory to search for mortgage lenders by lender type and several other important criteria.
“How can I tell if I am working with a mortgage broker or a mortgage lender?” CFPB. Consumer Financial Protection Bureau, February 24 2017. Web.