What Is a Mortgage Broker?

A mortgage broker acts as a middleman between mortgage borrowers and different lenders. However, they do not use their own capital to originate loans. A mortgage broker connects lenders with borrowers on the basis of the their needs and financial situation, identifying the best mortgage for each unique borrower.

The broker gathers necessary documentation from the borrower, such as income, assets, bank statements, and employment documentation. They will also pull a credit report, assess credit scores, and look at other debts, such as credit cards and personal loans. The broker will complete the loan application and determine the appropriate loan amount, loan-to-value ratio, loan terms, and loan type, and then submit the loan to a lender for approval and underwriting. 

The mortgage broker can save a borrower time during the application process and money over the life of the loan. The mortgage funds are lent in the name of the mortgage lender, and the mortgage broker collects a commission fee compensation for their services. The broker only gets paid when the loan transaction is completed.

Mortgage Broker vs. Loan Officer

Unlike a mortgage broker, a loan officer is a representative of a financial institution, such as a bank or credit union, who offers direct assistance to borrowers in the application process. Loan officers are often known as mortgage loan officers (MLO). The loan officer is the contact for most borrowers applying for home loans from financial institutions. 

Finding the right mortgage can be handled online, but most consumers prefer a well-informed guide for such a costly and complex transaction. In fact, the reason why financial institutions continue to have so many branches is so they can connect loan officers for further loan options to potential borrowers.  

Once a borrower agrees to proceed with a loan officer, the loan officer helps prepare the application and then passes the application along to the institution’s underwriter, who assesses the creditworthiness of the potential borrower. If the loan is approved, the loan officer is responsible for preparing the appropriate documentation and the loan closing documents.

The loan officer will collect the appropriate closing documents for a mortgage or other loan. Some loans are more work than others, such as secured loans versus unsecured loans. Mortgage loans require a hefty stack of documentation due to the many federal, state and local regulations that pertain to them.

There is some overlap between a mortgage broker and loan officer. Loan officers are knowledgeable about various loan products, whether buying or refinancing a home. They are well versed in the mortgage market and can advise borrowers on how to find the right mortgage for them. They, like brokers, can also offer insight on loan eligibility, being responsible for the initial screening process. 

In contrast, a mortgage broker works on the borrowers behalf to find the lowest available mortgage rates and appropriate loan programs available through multiple lenders. The number of lenders accessible to the borrower, however, are limited based on the broker’s approval to work with each lender. 

Brokers do not receive compensation unless the loan closes. It’s in the brokers best interest to work with the borrowers on a more personal level. If a loan originated through the broker is declined, the broker will then apply to another lender. Meanwhile, if a loan originated through a loan officer is declined, no further action is taken with the financial institution.  

How Much Do Mortgage Brokers Charge?

Whether buying a home with a real estate broker, real estate agent, or for sale by owner, a mortgage broker can be used. Mortgage brokers are usually paid a commission—one to two percent of the loan amount. This differs from loan officers, which are paid a salary and are not incentivized by loan volume or amount. 

The commission is paid by either the borrower or lender upon closing of the loan. It’s usually paid by the lender, in which case the broker may advertise a “no-cost” loan. However, in those cases the broker’s commission might still be baked into the loan via a higher interest rate. The broker may offer different fees based on whether the lender or borrower pays the rate. 

The mortgage market, home prices, and loan competitiveness will help determine the commission rate. In more competitive markets, such as bigger cities with high-priced properties, have rates as low as 0.5 percent. Federal regulation, notably Dodd-Frank, limits mortgage broker fees to no more than three percent. 

Benefits of a Mortgage Broker

Firstly, working with a mortgage broker saves time and legwork for the borrower. They know how to navigate the mortgage markets and can act as a guide. Mortgage brokers have frequent connections with a broad range of lenders. A broker can steer borrowers away from certain mortgage companies with onerous payment terms and the like.

Secondly, brokers have better access to lenders. In fact, some work exclusively with mortgage brokers, relying on them to bring in leads and business. You can call lenders directly for a mortgage, but often, brokers retrieve special, lower rates from lenders due to the business volume they provide. Brokers can also help manage any other associated fees, such as application, appraisal, and origination fees.

How to Find a Mortgage Broker

Finding lenders near you is easy—consider reading online reviews prior to picking one. Here are some tips on finding the best broker:
Referrals work best. Ask someone you know or a friend of a friend who has recently bought a house to share their experience—good or bad.

leverage your current bank. Reach out to your current financial institution for references or mortgage brokers they use. You already have a relationship with them and it’s in their best interest to be as helpful as possible. 

Ask your real estate agent. They can offer guidance on local brokers that have solid reputations.

Questions to Ask Mortgage Brokers

  • Homebuyers will be most interested in mortgage rates, but knowing what to ask can help narrow the search. Before committing, ask:
  • Do you have a list of lenders you work with?
  • Can you provide a complete list of fees that are typically charged and the amount?
  • What’s your typical commission rate and is it paid by the borrower or lender?
  • Do you have different rates for lender-paid versus borrower-paid commission?
  • Will the lender waive some fees, such as the credit report or appraisal?
  • What are the typical down payment requirements?
  • Do you work with FHA-, VA- or USDA-approved lenders? 
  • What are the typical turnaround times? For pre-approval and for the time from choosing a house to closing.
  • Can you provide references?