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Mortgage Brokers 

There are two distinct entities involved with providing mortgage loans to consumers – mortgage brokers and mortgage lenders.

Mortgage lenders operate either as retailers, wholesalers, or both. When  operating as a retailer, the lender performs all the functions of providing the mortgage loan – taking the loan application, assisting the borrower on determining the appropriate loan program, processing the loan, underwriting the loan, preparing the closing documents, and providing the funds. 

In the wholesale environment, the mortgage functions are split between the lender and the broker. The lender will underwrite the loan and provide the funds, and depending upon on the arrangement with the broker, may prepare the closing documents. The broker will perform all the other mortgage origination functions.

There are approximately 20,000 mortgage broker operations across the nation. Mortgage brokers are involved with over half of all residential loans originated in the U.S.

The typical mortgage broker has relationships established with 20-40 wholesale lenders. This means that the broker is in a position to offer the loan products and corresponding pricing of each of these lenders to its customers.

Why Utilize a Broker

There are 2 main reasons to utilize a broker instead of a lender – lower prices and better loan product selection.

§         Price

Brokers provide consumers access to wholesale prices posted by lenders, as opposed to the retail prices consumes would be obligated to pay if they utilized a lender. Brokers receive lower prices from lenders because brokers perform the costly services for lenders that the lenders would otherwise be forced to provide for themselves. The most of important of these services is finding and servicing customer needs. Absent mortgage brokers, lenders must maintain a costly sales and loan processing force, plus the infrastructure to support it. Thus, mortgage brokers do not add any net cost to the lending process.

Also, brokers can shop lenders much more effectively than consumers. Brokers know the features of the transaction that affect the price, and they have relationships with multiple lenders and are therefore well positioned to find and shop among the lenders offering particular features.  And because brokers receive price information from multiple lenders on a daily basis, they can shop for the best terms available on any given day.

§         Product Selection

No one lender can offer every loan product. And as a general rule, most lenders specialize in specific market niches – jumbo loans, FHA/VA loans, adjustable rate mortgages, borrower’s with poor credit, etc.  The result is that a consumer utilizing a lender may be steered toward a lender's specific loan product, not necessarily the loan product that is best for the consumer.  

Brokers have the ability to locate the lender or lenders that specializes in a specific market niche.  Thus, the benefit to using a broker is the consumer has access to more loan products and more importantly, the right loan products.

How Brokers Make Money

The typical broker makes its money by adding a “markup” to the price it receives from the lender - the lenders quote the wholesale price to the broker, leaving it to the broker to add the markup in order to derive the "retail" price offered the consumer. 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.

There is no set amount that a broker will markup the price. The general rule is that brokers will set the markup 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.  

Upfront Mortgage Brokertm

There is a new type of mortgage broker that has a different method of operating - an Upfront Mortgage Brokertm .  This type of broker provides a consumer with all  the benefits of a typical mortgage broker but with the added assurance of fair treatment provided by pricing transparency, and the absence of conflict of interest that can occur between the broker and the consumer.

For more information on the differences between brokers and lenders, and the  advantages to using a mortgage broker, visit the website of nationally syndicated columnist and mortgage advisor Jack Guttentag, The Mortgage Professorä

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