A mortgage broker is an independent contractor that offers a huge basket of home loans originating from various lenders.
While there are brokerages these days that become correspondent lenders, a pure mortgage broker will not originate or offer their own loan products.
The absence of their own portfolio of loans enable a mortgage brokerage to maintain it’s status as being independent of lenders and practicing no bias of one over another.
At least that’s what the textbook says.
In real life practice however, it is easier said than done.
The primary tasks of mortgage brokers is to counsel borrowers regarding any problems they might have to qualify for a loan, and help them find the best deals that they are eligible for.
This helps position brokers in a very unique position.
You see… lenders, especially big banks, approve and reject loan applications all the time.
But they often practice a lot of secrecy regarding what they reveal to borrowers.
This is partly because of two main reasons.
- They don’t want borrowers to know what kind of dirt they have been digging up
- They don’t want borrowers to game the system when they realize how underwriting is carried out
Yet anyone with half a brain knows that informing a borrower what’s wrong with his credit or otherwise will help him navigate through the rough waters and finally obtain an approval.
The problem is that even though lenders want to approve a borrower’s mortgage, they just cannot bring themselves to tell the borrower is that all he has to do is to settle that credit card bill that has been in delinquency for the last 6 months.
A revelation like this can have huge negative consequences to a bank when revealed to the wrong person. Especially when that borrower has a vengeful axe to grind.
So this job of consultation goes to a broker without needing any party to say so. It is implicitly understood by lenders and brokers with no official agreements.
A broker can be expected to be more frank and upfront with the problems a borrower is facing and give advice on the solutions available.
And even if a borrower is unable to obtain a loan from a particular lender, the broker would have no issues recommending an alternative lender who would gladly take up the loan.
Contrast this with a lender. You are not going to see a lender suggesting a borrower to go to another lender with a better product.
How brokers make money
There are two primary ways that brokers generate n income.
- Margin over wholesale price
- Commissions from lenders
The first method, which is a common one, is that lenders would quote brokers a wholesale price for their loans.
The brokers then add a markup over it and bank in the difference themselves.
For example, lender might offer a wholesale price on a loan program at 5% and zero points. The broker will then price the loan at 5% and 1 point.
The yield spread premium is also a variation of this.
The second method is a straight commission depending on the loan amount accepted by the borrower.
In this case, broker will either be charging little to no fees, but will be paid by lenders when loans get accepted and disbursed.
There is also a rise in upfront mortgage brokers in recent years.
These brokers charge customers upfront clearly indicating their prices with details.
Why use a broker
This answer is so clear cut to me that I’d reverse the question and ask “Why not?!”
But I understand that general consumers still have reservations about why they should even step foot into a broker’s office which they have never even heard of when they can step into the branches of the most reputable banks in the country.
The simple answer is that brokers know the whole market… at least much more than lenders.
Because of this, they are the most knowledgeable professionals about home loans. Even more so than lenders.
The best part is that borrowers can have frank discussions openly without having to beat about the bush. Try that with a lender and you might be tearing you hair out from all the politically-correct answers.
They are your best chances of finding the best loans.
If you think that you might get tricked by predatory practices, consider that lenders can be mortgage predators as well.
What’s key is that you have some knowledge about the market and be watchful with the actions of a broker.
If there’s any doubt about their intentions, you can always walk away and into the office of another broker.