The Role of Mortgage Brokers in Real Estate Transactions

Key Takeaways

• A mortgage broker is an individual who acts as an intermediary between mortgage borrowers and lenders, bringing them together.

• The broker relieves the mortgage shopper of having to find the best lender for their interest-rate needs and financial situation. 

• Mortgage brokers must receive training and be licensed in the state in which they work.

In the real estate market, a mortgage broker acts as an intermediary between lenders and borrowers. It is important for investors in real estate to understand the role of such brokers. But exactly what is a mortgage broker? 

What is a Mortgage Broker?

This individual acts as an intermediary between mortgage borrowers and lenders, uniting them in the real estate market.

They relieve the mortgage shopper of having to find the best lender for their interest-rate needs and financial situation. The potential borrower may be buying a property or seeking refinancing.

The broker will also pull together all the documents and other paperwork needed for the lender underwriting process. This also means gathering information regarding income, assets, credit standing, debt, and employment. The broker will use the data to help determine the appropriate loan amount and loan type.

The broker will present the documentation to lenders. At the same time, they work to gather and apprise the borrower of lender loan options. Throughout the application process, the broker communicates with both parties.

When the application is approved, and funds are lent, the broker receives a commission from the lender. Typically, the borrower pays all or part of the commission — called an origination fee — at closing.

What is a mortgage broker? The question is now answered.

What is a Loan Officer?

A loan officer is employed at a bank or credit union, for which they offer borrowers mortgage rates or programs. This is typically the borrower’s point of contact.

The loan officer reviews loan applications, explains available options, and assists with the application process. They also verify borrowers’ financial information and ensure federal and state regulation compliance. In addition, they approve applications or route them to underwriting or management.

Note that it may take some time for a loan officer from a large bank to attend to the borrower, as they are working with many borrowers simultaneously.

What is a Mortgage Lender?

A mortgage lender is a person at a mortgage bank or other financial institution who offers and underwrites home loans. 

They lend funds based on their specific guidelines regarding borrowers’ creditworthiness and loan repayment ability. They can also help with the application process, approve loans, and guide the lender through closing. Other responsibilities can include setting up home appraisals.

The lender establishes establishes mortgage aspects such as terms, interest rate, and repayment schedule

Advantages and Disadvantages of Mortgage Brokers

As with most everything, there are pluses and minuses to using a mortgage broker:

Advantages 

• Can save borrowers time and money.
• Can provide access to lenders they may not have otherwise.
• Can help borrowers avoid unscrupulous lenders or those who do not meet borrower needs.
• Can get the borrower better loan rates and possibly fee waivers.

Disadvantages 

• Borrower likely must pay broker fee.
• Borrower may be able to get the same, or better, lender terms themselves.
• Some lenders do not work with brokers.
• Some brokers may steer the borrower to lenders who pay them more.

How Do Mortgage Brokers, Loan Officers and Mortgage Lenders Compare?

What is Loan Officer vs. Mortgage Broker vs. Mortgage Lender? What they have in common is that each of them can help one secure a home loan. But it can be challenging to determine which is the best personal option to work with.

Note that unlike a mortgage broker, who is usually in business for themselves, a loan officer usually works for one company. The mortgage lender originates loans and works with borrowers via loan officers.

In terms of loan options, brokers work with a number of lenders to find the optimal loan. Meanwhile, loan officers only offer loans from their bank, and mortgage lenders are limited to their own programs.

Regarding fees, mortgage brokers charge a percentage of the loan amount. Loan officers may charge a prepaid commission, while mortgage lenders may levy application and loan origination fees.

Education requirements also vary. Mortgage brokers must receive training and be licensed in the state in which they work. For loan officers, a bachelor’s degree is often required. They also must be licensed. Accreditation and certification for mortgage lenders varies by state.

How Do I Choose a Mortgage Broker?

To find a mortgage broker, borrowers can ask around for referrals for candidates who have the right experience and credentials. They can also search online, paying attention to any borrower reviews.

What to Ask Before Using Mortgage Brokers 

Before enlisting the services of a mortgage broker or lender, here are some questions the borrower should consider asking:

• What is the best loan type for me? Options could include fixed-rate, interest-only, adjustable-rate, and negative amortization.
• What is the interest rate and APR? Note that not all lenders calculate the annual percentage rate the same.
• What are down payment requirements? It is not always the standard 20%.
• What are the origination fees? They are typically between 0.5% to 1% of the loan amount.
• What are other fees? These can include fees for appraisals, credit reports, pest inspection reports, and the title policy. Other costs will likely include taxes and, where applicable, escrow fees.
• Is a loan rate lock available? Interest rates do fluctuate and change daily.
• What is the loan processing time? The average is about 43 days.

Real Estate, Art, and Alternative Investments

Like real estate, art is what is called an “alternative” investment — alternatives to constantly fluctuating public markets. 

Such private-market investments are increasingly popular as investors seek refuge from volatility. Alternatives, which also include asset classes such as private credit and structured notes, can also improve portfolio returns. Historically, private markets have outperformed stocks in the last 15 downturns.

Investing in art was once the exclusive province of top-tier earners and those with expertise in art. In the last 20 years, owing in part to the Internet, the market has become much more accessible.

The leading alternative investment platform is Yieldstreet, on which $4 billion has been invested to date. It offers the broadest selection of alternative asset classes available, including opportunities in art. 

Through Yieldstreet’s art equity funds, for example, investors can invest in art without the responsibilities that accompany owning physical works. The platform’s curated and highly vetted offerings are subject to third-party appraisals before making fund placement. The opportunities seek a net annualized return of 15%-18%.

Investing in art also can help diversify one’s portfolio — essential to long-term investing success. Crafting an investment portfolio of varying asset classes and anticipated performances can reduce overall risk. It can also protect against inflation and even improve returns.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

What is a mortgage broker? This is someone who essentially matches those seeking a home loan with lenders who meet the loan seeker’s needs. Despite potential drawbacks, such brokers can be of great help to real estate investors. Borrowers must be sure to find the right one for them.

Remember that real estate, like art, can diversify investment portfolios and mitigate portfolio volatility.