The Key Financial Roles and How They’re Played
Especially for first-time buyers, getting to know who’s who in the loan process can be complicated — even surprising! First you meet the mortgage broker. Soon, other actors emerge. As your broker interacts with them, the drama unfolds.
Cast of Characters
Knowing everyone’s role helps a buyer anticipate the issues that arise on the way to the closing table. We’ll start with the first one the buyer meets — the mortgage broker — and then take a look at the other actors on the scene, and how they relate to each other. Especially important are their relationships to the star of the show: the home buyer.
The Mortgage Broker
The mortgage broker plays a leading role on a home buyer’s behalf. This is the person who sits down with the loan applicant to go over the best options for the circumstances, and the person who’s on the phone as each part of the applicant’s credit, income, and debt profile are plugged into the process.
Depending on your what a state’s law sets forth, the mortgage broker may be more than just a broker; this person may serve as the buyer’s agent. Then, if the aim of the hopeful home buyer is to get a mortgage loan, the duty of an agent is to look out for the applicant’s best interest.
In California, for example, brokers are agents; they have a fiduciary duty to their clients. By law, California mortgage brokers have strict fiduciary duties to loan applicants: they must put the applicant’s financial interest ahead of their own.
What are fiduciary duties? When a professional works in an agency capacity for client in a real estate transaction, that professional has legal duties to act in the client’s best interests. For a mortgage specialist, this could mean taking care to ensure the applicant understands a loan’s terms and conditions — such as the interest rate, the way payments will work, the handling of a borrower’s late payments — and telling their clients if those terms are disadvantageous.
In short, a broker is a salesperson, but an agent has duties, such as a duty of care in guiding you to behave self-protectively in the loan transaction. If you apply for a loan, be clear on your mortgage specialist’s duties to you.
The Money Lender
The mortgage lender is the financial institution — such as a national bank, regional bank, or credit union — with the money a borrower seeks to purchase a home. Most state courts and legislatures have determined that mortgage lenders in standard loan transactions owe borrowers no fiduciary duties.
Only in extraordinary circumstances — where the lender and borrower have a longstanding personal and financial relationship predating the loan at issue — could a borrower justifiably rely on a bank to act in that borrower’s best interest.
In the standard mortgage transaction, a bank is not legally required to disclose, for example, that the borrower is making a risky investment. For another example, a lender has the prerogative to sell the loan to another lender without giving the borrower a say.
Attention, buyers: The general principle for lending institutions is that they put their financial interests first in a loan agreement. This makes the fiduciary role of your mortgage specialist even more critical.
The Mortgage Servicer
Then there’s the mortgage servicer, which is often a different company than the one which originally lent the money. Often, the borrower interacts with this company through the website, to check the principal and interest and set up automatic payments. According to the U.S. Consumer Financial Protection Bureau (CFPB), a loan servicer handles the administrative tasks for each mortgage, answers borrowers’ questions, and manages their escrow accounts.
Like lenders, mortgage servicers usually owe no fiduciary duties to borrowers under normal circumstances.
Pro tip: A company known as the MERS® Servicer Identification System maintains a large store of data on loans and mortgage companies. The tool allows users to plug in an address or other identifiers to view the loan servicer associated with a home. The company also offers a directory of information for homeowners and loan shoppers.
The underwriter is the financial professional who sizes up the risks and either declines or agrees to accept a borrower. Underwriters decide whether extending money to an applicant will, all factors considered, be good for the lender. The mortgage broker informs the hopeful buyer of the underwriter’s expectations, all the way up to the final approval decision.
This all happens according to guidelines by which the underwriter assesses the borrower’s capacity to pay the mortgage. Factors include:
- The applicant’s credit profile.
- The applicant’s job history and current position.
- Evidence of income, and prospects for continuing income.
- The applicant’s other assets.
- The financial details of others to be involved with the loan or the property, such as a spouse, partner, or co-borrower.
- The applicant’s debt, including the debt involved in this home purchase, in relation to expected income.
- The history, condition, and market value of the property.
- How extended the lender is at the time.
The details are fed into underwriting software. If the results green-light the applicant, the lender receives a set of recommended loan terms and premiums for the borrower.
Not all credit profiles are black and white, so underwriters can call for many kinds of supporting information and apply their own professional discretion in complicated decisions and close calls.
☛ Thinking of applying for a home loan? Hoping to raise your credit profile? See our tips for improving your credit score.
Other notable actors that appear during the mortgage loan quest could be financial advisers and accountants. Certified Public Accountants are not typically cast in the role of the mortgage broker, so applicants might want to talk with their own financial professionals. These consultations can be helpful elements of a buyer’s due diligence before signing a loan agreement.
An extra pair of professional eyes is all the more valuable if the property is very expensive, if the applicant has had gaps in employment, or if unconventional income sources are involved, as occurs with self-employed or international buyers. Investor-buyers also rely on accountants for support. Investment properties can carry special risks for banks. For example, great prospects for future returns on an investment may look like mere expectations to a bank. CPAs can produce letters on behalf of loan applicants, or otherwise help their clients present their best possible cases to lenders.
Applause: Getting to “Yes” on Your Mortgage Application
With so much going on among multiple actors behind the scenes, loan applicants can feel mystified. Often it can seem as though the mortgage specialist has asked for similar pieces of information multiple times, requesting repeated updates that may be annoying to track down, and don’t seem to change the overall picture.
It’s best not to sweat the requests. Simply send whatever is needed as soon as you can to bring this drama to a satisfying conclusion…and enjoy a hero’s homecoming.
David Fowler Johnson: Federal Courts Hold That Lenders Do Not Generally Owe Fiduciary Duties to Borrowers (Oct. 2017).
Bob Hunt (California Association of Realtors®): Does A Mortgage Broker Have Fiduciary Duty to The Borrower? (Sep. 2016).
Consumer Financial Protection Bureau (CFPB): What’s the Difference Between a Mortgage Lender and a Servicer? (Sep. 2017).