Want to start a mortgage brokerage? Begin with a basic understanding of the mortgage industry
If you want to start a mortgage brokerage, you should know that it is no small feat. There are the moving parts of becoming a broker, understanding the industry, and starting your own business.
But that doesn’t mean it is impossible.
If you know what to expect going in, the steps involved become much more manageable.
In this article, we will detail exactly how to start a mortgage brokerage. We will also look at a mortgage brokers’ salary and the factors that affect it.
Here is everything you need to know.
A mortgage brokerage is a business that acts as an intermediary between potential borrowers and lenders, usually banks. For its services, mortgage brokerages earn a commission, which is usually a percentage of the loan amount.
To start your own mortgage brokerage—and make it successful—you should have strong entrepreneurial skills and a talent for finances. In this section, we will go over the different steps you must take to start a mortgage brokerage.
Here is a look at the general areas you will first need to cover:
- Gain knowledge and expertise
- Plan your mortgage business
- Open for business
Now, let’s break down each of these general steps into more manageable pieces. It may seem like a lot, but many of these steps are common sense and should not be overly taxing.
1. Gain knowledge and expertise
The first step you in starting your own mortgage brokerage is to gain knowledge and expertise. You may already have this, which is likely the reason you want to start a mortgage brokerage in the first place. But it’s worth going over anyway.
Learn the basics
Learning about being a mortgage broker means knowing how to find and secure home loans for your clients. For your services, you will receive a commission, which is often called broker fees or origination fees. These are usually between 1% and 2% of the value of the loan. This might allow the borrower to find a willing lender with a lower rate to save themselves time in their mortgage search.
Mortgage brokers act as a go-between for the loan originator and the prospective borrower. Some mortgage brokers do, however, sell existing loans from one lender to another.
Key responsibilities for most mortgage lenders include:
- advising clients on their mortgage options
- assessing borrower finances
- filing applications and securing documentation
- finding the best mortgage rates for clients
- securing mortgage pre-approvals
Obtain your mortgage broker’s license
In most cases, you will need a mortgage broker’s license to practice in your state. Some states, however, do not require you to be licensed. It is important to know the specific requirements in your state first. You can learn this by searching your area’s specific laws to find out more about the requirements. Before you take the state mortgage broker exam, you might need a college degree or equivalent in mortgage brokering.
You can search online to better understand your state’s requirements and applications.
Gain on-the-job training
Work for a realtor or a mortgage broker for at least one year before starting your own mortgage brokerage. This will help you understand the ins and outs of mortgage brokerages. It will also expose you to different scenarios that will help you build practical knowledge.
2. Plan your mortgage business
After you have learned the basics, obtained your mortgage license, and received on-the-job training, you can start planning your mortgage brokerage business.
Here is a look at some of the steps involved in this part of the process.
Determine your target market
Determining your target market means deciding whether your brokerage will focus on residential real estate loans or commercial real estate. Different market segments require different marking approaches, as well as contact with different lenders.
You also have the option to focus on a certain type of borrower. For instance, you can specialize in working with clients buying a second home. Another option is working with clients with unpredictable income sources. This can be a great opportunity to differentiate yourself from other mortgage brokerages.
Create a business plan
This includes writing out the goals, purpose, and strategy of your business in an official business plan. Doing so will help you when applying for the funding required to start a mortgage brokerage. Review it every now and then to ensure you are on track with the progression and growth of your brokerage.
Apply for a mortgage broker license
Applying for a mortgage broker license may not be needed, but some states require a mortgage brokerage to get a special license or other certifications. You can check the Nationwide Multistate Licensing System (NMLS) website to find out whether this step applies to you and the state you live and work in. The NMLS site will also provide links to applications for getting these licenses.
Obtain necessary funding
You can get the necessary funding for your mortgage brokerage through private funding or a small business loan. Start-up costs will be required and depend on your target market and location. A loan might be necessary to get started, especially if you are renting out office space.
If you need a loan, make sure it will pay for the costs of office space, insurance, office equipment, and living expenses for a minimum of six months.
Apply for a business license
You can apply for a business license by registering your mortgage brokerage with your city. Contact your county hall or city to complete the necessary paperwork. There may be a small fee required when registering your mortgage brokerage.
3. Open for business
You have learned the basics of being a mortgage broker and you have created a business plan for your brokerage. The final step is to prepare yourself to open for business.
Here are five steps to help you accomplish your dream.
You will need an office that is both visible and accessible if you plan to meet clients in an office space. Be sure to choose a space that is within budget. If your brokerage succeeds after a year or so, you can upgrade to something nicer. Wherever you plan to open for business, make sure it has reliable internet, phone, and other necessary services.
Due to the COVID-19 pandemic, many businesses have created a hybrid working situation. This may allow you to stagger the days your brokers work from home and at the office. This means you may have an opportunity to save some money with a smaller space, especially in the beginning.
Acquire office equipment
The necessary office equipment to open for business usually includes desks, computers, telephones, printers, etc. If brokers work a portion of the week out of the office, you may be required to provide cellphones and laptops.
Buy liability insurance
Liability insurance is important if your mortgage brokerage faces a lawsuit. You can buy liability insurance from any large insurance provider.
The type of insurance you will need is called Errors and Omissions (E&O) insurance. This protects you from the financial consequences of any errors and/or omissions you make when working with clients or lenders. This may include settlements, defense costs, and costs of judgements.
Market your brokerage
References and referrals are a great, and popular, way to generate business for your brokerage. You can start with family and friends, then work your way out. You might also draw significant business by advertising your services locally. When marketing your brokerage, make sure you emphasize what you can do for your clients. Can you get them lower interest rates? Can you save them time?
Advertising in local publications and residential real-estate magazines will be a great option if residential consumers are your target market. Real-estate magazines and trade magazines are great places to advertise if you want to attract business clients.
You’re there. Now there is nothing left to do but open your mortgage brokerage. Start assessing the financial situations of your first clients to find the best mortgages for them. Each client will require special attention. It is important to be genuinely helpful so that you can grow your business through references and referrals.
The average salary for a mortgage broker in the United States is $170,342, according to Indeed.com. This figure can vary depending on your level of experience and location.
Your employment type may also impact your overall pay. Some mortgage brokers work as independent contractors; others work for mortgage brokerage firms and banks. While independent contractors may have less consistent income, they benefit from setting their own work hours.
Mortgage brokers usually earn a base salary and a variable commission that depends on a few factors, including the following:
Mortgage brokers charge, on average, a commission of 2.25% for every loan. Terms vary, but federal regulations also prohibit brokers from charging above 3% of the total loan amount. If, for example, a mortgage broker charges 2.25% commission on a loan of $500,000, the commission would be $11,250.
Mortgage brokers can work on behalf of either lenders or borrowers. This means a broker’s fees depend on the agreement they have with their clients. Generally, mortgage lenders pay a higher commission than borrowers. Lenders typically compensate brokers between 0.5% and 2.75% of the loan amount. Brokers usually charge borrowers an origination fee under 3% of the loan amount.
Most of the time, mortgage brokers determine their commission rate based on the housing market in their specific area. For instance, if you work in a more competitive housing market, you charge lower commission rates. This positions you as a better, more affordable choice compared to other brokers. Since prospective buyers have fewer options in markets with less competition, you may charge more.
If you want to start a mortgage brokerage, learn the basics of brokering, understand the industry, and know the steps in opening your own business. It sounds like a lot, but it is possible. Just keep the various steps in mind when you begin. As we have seen, becoming a broker can be highly lucrative—so it will be worth it.
If you want to learn how to start a mortgage brokerage, get in touch with one of the mortgage professionals we highlight in our Best in Mortgage section. Here you will find the top performing mortgage professionals across the USA.
Did you find these tips on starting a mortgage brokerage useful? Let us know in the comment section below.