What is a Mortgage Loan Broker?
What is a Mortgage Broker?
There you sit, sifting through website after website advertising mortgage loans for home buyers, when your brain suddenly seizes up and refuses to move forward. Until this point, you’ve been seeing the rates for banks and blogs about bankers, but what is this “mortgage loan broker?” Maybe that’s enough internet for today (after you read this, of course).
Mortgage Loan Brokers and Bankers
There are two main sources of mortgage loans for the general public: banks and brokers. A bank loans its own money to a borrower, even if they end up selling that loan later. Brokers, on the other hand, help connect buyers with investors and banks by acting as an intermediary. A broker, then, is a person who brokers your mortgage loan.
While that sounds perfectly lovely, like the difference between being waited on in a restaurant and having to DIY your counter-serviced lunch, some mortgage loan brokers have committed some seriously unethical acts in the past. Although the housing market collapse wasn’t their fault entirely, a lot of the exotic mortgage loans that certain brokers made were absolutely in the worst interests of their clients.
That’s not to say that a mortgage broker is all bad. You just have to be careful who you work with. Sometimes it pays to shop around.
Pros and Cons of Using a Mortgage Loan Broker
Because your average mortgage loan broker has access to a large portfolio of mortgage investors, they can be highly useful for a wide range of borrowers. Some can even access FHA, VA and USDA programs, but it will depend on which companies they’ve developed relationships with over their time in the business. Let’s talk pros and cons:
Mortgage Broker Pros:
You don’t have to shop mortgages by yourself. There are a lot of different types of loans out there and if you’re not in the industry, it can be really challenging to keep up with the changes. In addition, there are sometimes programs available for particular clearly identified groups (like first time home buyers, Native Americans, etc.) that you might not even know about. In these situations, a broker can be really helpful. They’ll do the shopping, based on the information you provide, freeing you up to start packing for your eventual move into your new home. Your options will open up in front of you like a blossom or something.
Credit problems aren’t the end of the conversation. So many banks are still terrified to work with anyone who has minor credit problems, let alone those that have had a bankruptcy, foreclosure or short sale, even though a not insignificant percentage of those were caused by forces outside of the potential borrower’s control. This is not the case with the investors and banks that work with mortgage brokers. They can make subprime loans (it’s not a bad word, really) with interest rates that are priced by your risk as a borrower. These loans aren’t always pretty, but if you really need a mortgage or that scar on your credit won’t be gone any time soon, you may do better with a broker.
Mortgage Broker Cons:
The help can be costly. Like anyone else, mortgage brokers like keeping the lights on. Since they don’t work directly for any of the lenders they have relationships with, they’re instead paid a commission on what they sell. This shows up on the closing statements under several different names, but it all spells the same thing: added cost. If you know for sure you want an FHA loan, for example, a broker will not usually be your best bet. However, if you do need the help shopping around, the added cost (usually around one percent of the loan amount, but this can vary) can be completely worth it.
Mortgage brokers may sell unqualified mortgages. First, a bit about qualified mortgages. These are mortgages that are considered to be more stable and safer for borrowers of all experience levels. Their terms, features, and associated fees are highly regulated to protect consumers. Banks almost exclusively deal in qualified mortgages. Brokers, on the other hand, deal in whatever they can, and they have and will continue to sell “unqualified” mortgages. This is important because if you’re not carefully reading your paperwork, you may end up with a balloon payment, interest-only loan or something worse, like a mortgage that actually grows as you go along.
Choosing a Good Mortgage Broker
Brokers, like anyone else, can be researched and interviewed before you choose one to work with throughout your home-buying process. There are a few things to look for to ensure you’re not only getting an ethical broker, but one that has a high level of competency.
Check their online reputation. It’s absolutely true that people are more likely to leave negative reviews than positive ones, but if the same kinds of problems crop up again and again, you know there’s a bigger problem than a disgruntled borrower. If a broker responds to those negative reviews with hostility, definitely steer clear.
Ask about their lending stable. How many banks and investors does the broker have available to them? Smaller numbers may indicate that they’ve not been in the business very long, or that they have a hard time maintaining relationships due to unethical practices. Unless they explain the reason for a small portfolio (maybe they’re only selling specific loan programs because of a solid track record from those lenders), really give those lenders some thought before signing on.
Throw out lots of questions about getting a mortgage. Even if you’ve read all the information out there about getting a mortgage (because why not?), ask the broker in front of you lots of questions that you probably know the answers to, without making it into a quiz show or an interrogation. If they’re more than happy to educate you, they’re also likely to have your interests at heart. A broker who gives you a lot of wrong answers or rushes through is either inexperienced or more interested in a commission than your success.
Talk to your Realtor. Your agent has probably come across the brokers you’re considering at some point in their career. The longer the career, the more likely they are to have crossed paths. Your agent can give you their perspective, which might include how difficult it is to close a loan using that broker, as well as the general reputation of certain brokers within the real estate community.
The right mortgage broker can be the best friend of a hard-to-fit borrower or the salvation of an already overworked borrower who can’t even fathom putting the time in to find a loan that suits them best. Just remember that it will probably cost you a bit more to get one involved in your transaction and you really need to read all the paperwork carefully because they can and do sell non-qualified mortgages to the public.