Mortgage broker vs lender: who does what and how each is paid

Who does what

Lender. The CFPB describes a lender as a financial institution that makes loans directly. You repay the lender, or the company it assigns to service the loan. Banks, credit unions and mortgage companies are all lenders.

Broker. A broker does not lend money. The CFPB explains that you can use a broker to find different lenders or loan products. The broker takes your application, shops it to lenders it works with and manages the process to closing, but the loan is made by a lender.

Loan officer. The CFPB notes that loan officers often work for one specific lender, while brokers typically work with several. Both are loan originators under federal rules.

How they are paid

The CFPB explains that loan officers and brokers are usually paid a loan-specific fee or commission, paid either by you or by the lender. Federal rules limit how that pay works:

• No pay based on loan terms. A loan originator cannot earn more because you take a higher rate, a prepayment penalty or higher fees.
• No double pay. An originator cannot be paid by both you and the lender on the same loan.
• Flexible structure. Within those limits, lenders can pay salaries, a fixed amount per loan, a percentage of the loan amount or a combination.

The CFPB's rules also require originators to meet character, fitness, background and training standards. Most must be licensed or registered with the Nationwide Mortgage Licensing System, and their NMLS IDs appear on page 3 of your Loan Estimate.

Where the fees show up

Broker compensation appears in section A of page 2 of the Loan Estimate, origination charges. If you pay the broker, you will see the fee there. If the lender pays the broker, the cost is built into the rate, and the Loan Estimate may show it for information. Either way, the rate and section A together tell you what the loan costs.

Advantages of each

A broker can help when your situation is unusual, because the broker can look across several lenders' rules. It can also save you time compared with applying to several lenders yourself.

A direct lender gives you one company from application to closing. That can mean clearer communication and fewer handoffs. Some lenders also have programs or pricing only available directly.

Neither guarantees the best price. The CFPB's advice is the same either way: shop around for the best terms and the lowest rate and fees.

Questions to ask

• Are you a lender, a broker or both on this loan?
• If a broker, which lender will fund the loan and service it?
• How are you paid, and who pays you?
• Can you show me the same loan with and without points?
• What is your NMLS ID?

The bottom line

A broker shops lenders for you, and a lender makes the loan. Federal rules stop either from earning more for a worse deal, but they do not guarantee the best deal. Get at least two Loan Estimates for the same loan on the same day and compare the rate and section A.