How Do Mortgage Brokers Find and Select Mortgage Loans?

A mortgage broker can place your loan only with wholesale lenders, meaning lenders that fund loans brought to them by brokers, that have approved its brokerage, so its choices are those lenders' programs at that day's prices. The broker prices your scenario (credit score, down payment, loan amount, loan term, and loan type) with some or all of those lenders and recommends a loan. Federal rules treat a broker as having avoided steering you to a loan for higher pay if it checks at least three of the lenders it regularly works with (or all of them, if fewer) and shows you the lowest-rate loan, the lowest-rate loan without risky features, and the loan with the lowest points and origination fees. If the chosen lender declines your application, it must tell you why, and the broker can submit your file to another lender whose rules fit.

Which lenders can a broker use?

Lenders decide which brokers they take loans from. Fannie Mae requires lenders that sell it broker-originated loans to keep written procedures for approving and managing brokers, including a review of each broker's latest financial statements, current licenses, and background checks on its principal officers, and to review the performance of each broker's loans every quarter. The broker's own licensing is covered in what a mortgage broker is.

For the safe harbor comparison, a lender counts as one the broker regularly works with if any of these is true:

• The broker and the lender have a written agreement.
• The lender made a home loan from one of the broker's applications in the current or previous calendar month.
• The lender made 25 or more home loans from the broker's applications in the previous 12 calendar months.

Ask the broker how many lenders meet that test for your loan type. For government-backed loans, whether a broker can offer FHA, VA, or USDA loans explains which lenders a broker needs. To weigh a broker's lender list against banks and direct lenders, see how to choose a mortgage lender.

How does a broker price your scenario?

Each lender sets its own price. The Consumer Financial Protection Bureau (CFPB) says a higher credit score generally gets you lower rates and more lenders to choose from, and that a larger down payment or a shorter loan term typically lowers the rate. Lenders also price the same borrower differently on the same day. Freddie Mac measured the standard deviation of rates on similar applications that different lenders submitted on the same day, a measure of how widely rates spread around the average, at about 0.5 percentage point in October and November 2022, up from an average of under 0.2 point from 2010 to 2021. Its sample was 30-year fixed-rate conventional (not government-backed) purchase loans of $250,000 to $350,000 to borrowers with credit scores of 740 or higher who borrowed 75% to 80% of the home's value.

Each quote pairs a rate with upfront charges. Discount points are fees you pay to lower the rate, and one point equals 1% of the loan amount; some lenders also call other percentage-based fees points. Lender credits lower your closing costs in exchange for a higher rate. Both appear on page 2 of the Loan Estimate, the standard form showing a loan's rate and costs: points in Section A and credits in Section J. Ask the broker for each lender's rate with zero points and no credit so you can compare base prices.

If the lender pays the broker, that pay cannot change with your rate or other loan terms, though it can be a fixed percentage of the loan amount with a set minimum or maximum. The percentage can differ from one lender to the next, which is the conflict the anti-steering rule targets. Who pays the mortgage broker explains lender-paid and borrower-paid compensation.

What does the anti-steering safe harbor require?

Regulation Z, the federal Truth in Lending rule, bars any loan originator, whether a broker or a lender's loan officer, from steering you into a closed-end home loan (one with a set amount and repayment schedule) because it pays the originator more, unless the loan is in your interest. A broker is treated as complying if, for each type of loan you said you want (fixed-rate, adjustable-rate, or a reverse mortgage, which lets an owner borrow against the home and is repaid when the owner leaves), it gets options from at least three lenders it regularly works with, or from all of them if there are fewer than three, and presents:

1. The loan with the lowest interest rate. For an adjustable-rate loan whose starting rate is fixed for less than five years, the comparison uses the fully indexed rate, meaning the index (a published market rate) plus the lender's margin, instead of a discounted starting rate.
2. The lowest-rate loan without risky features. Those features are negative amortization (a balance that grows because payments do not cover the interest), a prepayment penalty (a fee for paying off the loan early), interest-only payments, a balloon payment (a lump sum of the remaining balance) in the first 7 years, a demand feature that lets the lender require early repayment, and shared equity or appreciation, where the lender gets part of the home's value or gain.
3. The loan with the lowest total of discount points, origination points, and origination fees, or, if loans tie, the one of them with the lowest rate.

The broker must believe in good faith, based on information reasonably available to it, that you likely qualify for each loan it shows. One loan can meet more than one test, so you may see two loans instead of three, and the options can all come from one lender. If the broker shows more than three loans of one type, it must point out the ones that meet these tests. The safe harbor is optional, but a broker that skips it must still not steer you, so ask to see these options and the lender behind each one.

Example, hypothetical same-day quotes on a $300,000 fixed-rate loan with a 30-year payment schedule, where each lender's only origination charge is the points shown:

Lender D has the lowest rate, Lender A has the lowest rate without a risky feature, and Lender B has the lowest points, so the safe harbor calls for showing D, A, and B. A's monthly principal and interest is $1,995.91 against B's $2,046.53, a $50.62 difference. Counting that monthly saving and the lower balance A leaves, A's extra $3,000 is recovered after 48 months. If you expect to sell or refinance sooner, and the loans' other costs match, B costs less.

What happens if the lender declines your loan?

The lender, not the broker, makes the credit decision. Under Regulation B, the rule that carries out the Equal Credit Opportunity Act, a lender that denies your application must notify you within 30 days after it receives the completed application, either with the specific reasons or with a notice that you can ask for them within 60 days and get them within 30 days of asking. "Internal standards or policies" is not an acceptable reason, and neither is failing to reach the lender's qualifying credit score. If the broker sent your file to several lenders and you did not accept an offer, each lender that declined must notify you, directly or through the broker. When a credit report played a part, the notice must also give the credit score the lender used, name the credit bureau, and explain your rights to a free copy of the report within 60 days and to dispute errors. The mortgage approval process shows where in underwriting a denial can happen.

Match the next step to the reason:

1. A fixable item in your file. Dispute a credit report error, pay down debt, or document more income, then reapply.
2. A program limit. If the reason is a program rule, such as Fannie Mae's standard 50% maximum debt-to-income ratio (DTI, your monthly debt payments divided by your monthly income) for loans run through its Desktop Underwriter system, other lenders selling that loan to Fannie Mae face the same limit. A different loan program, a co-borrower's income, or a smaller loan can change the result.
3. One lender's product or price. The broker can submit your file to another lender whose program fits. That lender treats it as a new application, so ask for its Loan Estimate before you agree to go ahead. Keep the new credit checks within 14 days if you can: older FICO score versions count mortgage inquiries within 14 days as one, newer versions use 45 days, and FICO scores ignore mortgage inquiries less than 30 days old.