Common Questions About Mortgage Brokers
May 4, 1998, Revised November 8, 2006
A mortgage broker is a service provider who offers the loan products of multiple lenders who are called "wholesalers." A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender "underwrites" the loan which means deciding whether or not you are an acceptable risk. And it is the lender who shows up at the closing table with the money, not the mortgage broker.
The lenders that mortgage brokers deal with quote a "wholesale" price to the broker, leaving it to the broker to derive the "retail" price offered the consumer by adding a markup. For example, the wholesale price on a particular program might be 7% and 0 points, to which the broker adds a markup of 1 point, resulting in an offer to the customer of 7% and 1 point. (Each point is equal to one percent of the loan amount). But if the broker adds a 2 point markup, the customer would pay 7% and 2 points.
The general rule is that they set them in each case as high as they can get away with. An unsophisticated customer who shows no inclination to shop the competition will be charged more than a sophisticated customer who makes clear an intention to shop. Indeed, mortgage brokers often rationalize the high markups they charge some customers on the grounds that these are needed to offset the excessively small markups they are forced to accept on other deals. Some borrowers do turn the tables on mortgage brokers by threatening to bail out of a deal after most of the work has been completed unless the mortgage broker agrees to cut the price.
Probably not . In fact, if you are a reasonably astute shopper, you will probably do better dealing with a mortgage broker. Mortgage brokers do not add any net cost to the lending process, because they perform functions that would otherwise have to be done by employees of the lender. Furthermore, because mortgage brokers deal with multiple lenders, they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings, loans to borrowers who do not intend to occupy the property, loans with minimal or no down payment, and so on.
Bear in mind, though, that the income of mortgage brokers consists of the spread between the price they are quoted by the lender, and the price they can get the customer to pay. While they are motivated to get the lowest possible price from wholesale lenders, they are also motivated to get the highest possible price from you. Like other retail merchants, mortgage brokers prefer not to reveal their markups, which can vary all over the lot. Expressed as a percent of the loan, they can be as low as 3/4 of 1% and as high as 4 or 5%. If you are a sheep who swallows everything the mortgage broker tells you without question and without checking price quotes with other mortgage brokers, you are likely to suffer a sheep's fate -- you will be sheared.
Yes, select an Upfront Mortgage Broker, who will act more like your agent than like an independent contractor. Your negotiate your total fee in advance and don't have to worry about being sheared. See Upfront Mortgage Brokers.
What Do Mortgage Brokers Do?
A mortgage broker is a service provider who offers the loan products of multiple lenders who are called "wholesalers." A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender "underwrites" the loan which means deciding whether or not you are an acceptable risk. And it is the lender who shows up at the closing table with the money, not the mortgage broker.
How Do Mortgage Brokers Make Money?
The lenders that mortgage brokers deal with quote a "wholesale" price to the broker, leaving it to the broker to derive the "retail" price offered the consumer by adding a markup. For example, the wholesale price on a particular program might be 7% and 0 points, to which the broker adds a markup of 1 point, resulting in an offer to the customer of 7% and 1 point. (Each point is equal to one percent of the loan amount). But if the broker adds a 2 point markup, the customer would pay 7% and 2 points.
How Do Mortgage Brokers Set Their Markups?
The general rule is that they set them in each case as high as they can get away with. An unsophisticated customer who shows no inclination to shop the competition will be charged more than a sophisticated customer who makes clear an intention to shop. Indeed, mortgage brokers often rationalize the high markups they charge some customers on the grounds that these are needed to offset the excessively small markups they are forced to accept on other deals. Some borrowers do turn the tables on mortgage brokers by threatening to bail out of a deal after most of the work has been completed unless the mortgage broker agrees to cut the price.
Won’t I Save Money by Going Directly to the Lender?
Probably not . In fact, if you are a reasonably astute shopper, you will probably do better dealing with a mortgage broker. Mortgage brokers do not add any net cost to the lending process, because they perform functions that would otherwise have to be done by employees of the lender. Furthermore, because mortgage brokers deal with multiple lenders, they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings, loans to borrowers who do not intend to occupy the property, loans with minimal or no down payment, and so on.
Bear in mind, though, that the income of mortgage brokers consists of the spread between the price they are quoted by the lender, and the price they can get the customer to pay. While they are motivated to get the lowest possible price from wholesale lenders, they are also motivated to get the highest possible price from you. Like other retail merchants, mortgage brokers prefer not to reveal their markups, which can vary all over the lot. Expressed as a percent of the loan, they can be as low as 3/4 of 1% and as high as 4 or 5%. If you are a sheep who swallows everything the mortgage broker tells you without question and without checking price quotes with other mortgage brokers, you are likely to suffer a sheep's fate -- you will be sheared.
Is There A Way to Protect Myself Without Confrontation?
Yes, select an Upfront Mortgage Broker, who will act more like your agent than like an independent contractor. Your negotiate your total fee in advance and don't have to worry about being sheared. See Upfront Mortgage Brokers.