Homebuyer's Fair Mortgage Brokers

What is a mortgage broker?

March 30, 1995

Some common questions people have about mortgage brokers include:

What's the difference between a mortgage broker and a mortgage banker?
Where does the money for my mortgage come from?
Which is the best place to get my mortgage?

Experts differ in their answers to these questions. After you read this article, you may wish to consult some of the sources in Recommended Reading.

Defining Terms

Let's start with some terminology. The investor in your mortgage is the institution that supplies the funds for your loan. The originator of your mortgage is the institution that handles the loan from application through closing. The servicer of the loan handles your monthly payments and pays your insurance and taxes out of escrow.

A bank or savings and loan can be the investor, originator, and servicer. Mortgage bankers typically originate and service loans, but the funding comes from other investors, including GNMA (for FHA loans), FHLMC, and FNMA. A mortgage banker will forward your monthly payments to GNMA, FHLMC, and FNMA. (These agencies often in turn act as conduits, pooling your mortgage with similar mortgages which are sold to large banks, insurance companies, and pension funds.) Mortgage brokers typically originate loans, but servicing is performed by mortgage bankers and funding comes from investors.

Several years ago, there were very few banks or large institutions willing to act as investors in mortgages for people with bad credit. Some mortgage brokers specialized in finding investors in such mortgages. Today, there are many more investors, including traditional banks and savings and loans, willing to invest in higher-risk mortgages. The distinction of mortgage brokers as specialists in such loans is fading.

Should you use a mortgage broker?

Some experts say that mortgage brokers are helpful because they have access to mortgage programs from more than one originator. Other experts say that mortgage brokers just add another layer of fees to the process, and that their commissions can provide incentives to steer borrowers toward loans that are less than optimal. However, regarding the issue of fees, it is important to point out that brokers often do much of the work involved in processing an application, so that their fees do not necessarily increase the total cost of originating the loan.

There is no general rule that says you always will do better with one type of lender than another. What you should care about are costs (rate, points, fees), fit of loan program to your needs, experience, and integrity. Regarding the latter, look for a clear explanation of when your loan will be approved and what it will cost.

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