How to Become a Mortgage Broker
So you’re thinking about becoming a mortgage broker. Big money. Independence. Maybe you’re already involved in the real estate industry or wealth management and have ideas about where to find clients. You’re good with numbers, intrigued by real estate, good with people and are looking for a new career. How should you get started?
In this article, we provide an overview of key questions and decisions you’ll face in becoming a mortgage broker. Spoiler alert. We’ll introduce you to a little-known onramp to brokering mortgages that offer lower barriers to entry and the potential for quick commissions. (Click here to skip to the best part now).
Types of Mortgage Brokers
Residential and commercial mortgage brokers are the two well-known types of brokers. Brokering business purpose loans, or BPLs, on residential properties is an emerging and attractive alternative. Let’s take a look at each of these types of brokers.
Licensed Residential Mortgage Brokers
Residential mortgage brokers typically work with consumers that either are (1) purchasing a primary or secondary residence or (2) refinancing an existing mortgage on a primary or secondary residence. Brokering these loans requires a license from the state where you’ll be doing business. There are some variations by state, but generally, the process includes:
- Setting up an account in the NMLS System. Link here: https://nationwidelicensingsystem.org/Pages/default.aspx
- Completing 20 hours of mortgage education from an NMLS approved mortgage school. For your state-specific education requirements, go here: https://nationwidelicensingsystem.org/courseprovider/Course%20Provider%20Resources/State%20Specific%20Education%20Requirements.pdf
- Passing the NMLS Mortgage licensing exam. Click here for the enrollment process: https://nationwidelicensingsystem.org/slr/common/mcr/Pages/IndividualTestEnrollmentProcess.aspx
- Applying for your NMLS license via your account you set up under #1 above.
- Completing a background and credit check and paying applicable fees.
- Getting hired by a state-licensed mortgage employer.
As a licensed residential mortgage broker, depending on your employer, you could broker a variety of different types of consumer mortgages including the more mainstream agency or conventional programs and government programs such as FHA, VA and USDA, as well as the lesser-known by valuable non-QM programs such as jumbo, alternative documentation, reverse mortgages, and asset depletion programs.
Coming Up the Learning Curve as a Residential Mortgage Broker
If you’re new to the real estate and mortgage industries, you’re about to embark on the journey of a lifetime. Mastering the ins and outs of the mortgage industry can be a lifelong endeavor. Here’s a simple overview of the areas where you’ll need to develop knowledge, skills and relationships:
- Real estate transactions: you’ll learn to understand the basics of how homes are bought and sold. This includes the roles of the key participants such as listing agents/brokers, selling agents/brokers, surveyors, property inspectors, appraisers, title companies, settlement/escrow agents, and insurance providers.
- Technology: most mortgage brokers use one or more loan origination software systems that are connected to various mortgage product pricing engines. Mortgage brokers also typically use some type of contact relationship management, or CRM, software to manage their client relationships. Many mortgage brokers also utilize various marketing tools to help automate their email and other marketing.
- Mortgage products: options are key in the mortgage brokering business. The more products you have to offer, the more options you can provide customers. But this means you’ll need to spend time learning the ins and outs of various mortgage programs.
- Marketing: you’re not likely to land a job at a mortgage shop where they hand you leads. Instead, you’ll need to develop your own marketing plan to generate leads. Many mortgage brokers spend much of their time developing relationships with realtors, title companies, attorneys and accountants that can send them business.
Commercial Mortgage Brokers
Commercial mortgage brokers arrange for financing on commercial real estate. Commercial real estate can include raw land, improved land, apartments, mixed-use buildings, office, retail, industrial, flex, storage . . . and the list goes on. Needless to say, there are many types of commercial real estate. To call a commercial mortgage broker a mortgage broker, also is a bit misleading. Whereas licensed residential mortgage brokers help consumers obtain mortgage finance, commercial mortgage brokers often assist with securing all types of real estate finance, whether debt or equity. Let’s just say the avenues for you to pursue and develop as a commercial mortgage broker are nearly limitless between the various property types, investment strategies and financing structures.
So how do you become a commercial mortgage broker? The path is less straightforward than for a residential mortgage broker where there are minimum federal requirements that create some uniformity across the U.S. Whether you’ll need a license depends on the state where you intend to do business. Some states require broad-based licenses to broker commercial mortgage finance. Other states may have more limited or even no licensing requirements.
Path to Success as a Commercial Mortgage Broker
Commercial real estate finance is more complex than residential real estate finance for several reasons. First, there are many different property types. Each of those types has its own nuances that affect the financing structures and terms available. Second, the use cases tend to be more numerous. Residential mortgage brokers primarily finance consumers buying or refinancing a primary or secondary residence. Most residential mortgage brokers don’t get involved in new construction lending or fix-and-flip finance. With commercial property, the owners are investors, and investors pursue a variety of different strategies to make money resulting in more complex and nuanced financing strategies. Third, the types of financing and terms available are much more varied for commercial real estate. Most home mortgages in the U.S. are guaranteed in one way or another by the U.S. government. Residential mortgage terms are fairly standard. Not as much the case in commercial mortgage finance. Yes, there are some government-sponsored programs, particularly for stabilized multi-family properties. Nonetheless, with commercial real estate financing, you’ll hear about senior, junior and mezzanine financing, construction, bridge and permanent financing, prepayment penalties or yield maintenance provisions, and the list goes on.
So here are some insights into what it takes to be successful as a commercial mortgage broker:
- Commitment: first things first. You will need a bit of a war chest before you embark on becoming a commercial mortgage broker. Brokers get paid on closed deals. While residential mortgage transactions typically happen in 30-90 days, most commercial real estate transactions take 90 days to more than a year. The paydays can be large, but infrequent, particularly when you are just starting out. You’ll need savings to live on while you work to close your initial deals.
- Crack the finance books: you must be comfortable with numbers and basic financial concepts to succeed as a commercial mortgage broker. Your clients are going to be financially literate and they’ll expect the same from you. You’ll need to learn how to calculate and interpret metrics such as capitalization rates, debt yields, net operating income or NOI, debt service coverage ratios, or DSCR, and a couple of handful of other terms.
- Select a starting point: you can’t boil the ocean. Develop a lay of the land and then systematically select a start point. For example, if you live in an area rife with mixed-use properties, maybe start there by surveying the lender market for available products for that segment. Then develop a strategy for identifying and contacting the owners of those properties. You get the idea.
- Find a mentor: want to dramatically increase your chances of success, find a mentor. Think of it like an apprenticeship. Find someone that is successful at this business and convince them to hire you as their assistant. Work hard. Learn the business. Graduate to having your own lender and client relationships.
Brokering Business Purpose Loans to Real Estate Investors
Is there a way to make a good living brokering mortgage finance without the regulatory overhang of consumer mortgage lending and the steep learning curve of the commercial real estate financing industry? In fact, there is.
Generally speaking, the term business purpose loans, or BPLs, refers to mortgages made to investors on residential real estate. Think of it as a commercial mortgage on a residential property. BPLs include hard money loans such as straight bridge, new construction and fix-and-flip loans, as well as permanent finance on single-family residential properties of one to four units.
What makes brokering BPLs so unique? A few things:
- No licensing required (maybe): All states regulate consumer mortgage finance. Some states regulate commercial mortgage finance. A minority of states require licensing to broker BPLs. That’s right. There’s some sound logic behind this nuance. With a BPL, the borrower is an investor borrowing not for their own personal home, but to make money. Generally speaking, one would expect an investor on average to be more sophisticated and capable of looking out for their own interests than the average consumer that knows little to nothing about real estate and real estate finance. At the same time BPLs, while incorporating some commercial mortgage terms and concepts, are not nearly as complicated or high dollar as the typical commercial real estate deal.
- Often overlooked: the BPL market has come a long way over the past decade. In the past, it was mostly community and regional banks and country club money that funded BPLs. Not the case today with numerous BPL lenders obtaining cost-effective and scalable capital on Wall Street. Nonetheless, most licensed residential mortgage brokers and commercial brokers overlook the BPL market. Thus, opportunity knocks for you.
- A Niche the Size of Texas: BPLs is a $10Bs a year niche. That’s right. At the time of writing (2021), we’re expecting $3T or more of new consumer mortgage originations in the U.S. So, yes, the BPL market which is measured in billions of dollars each year is a niche within the U.S. mortgage market. But it is plenty big for you to build a successful mortgage brokering business.
- Onramp: start with BPLs and then move towards either residential mortgage or commercial mortgage brokerage. The barriers to entry are low to broker BPLs. Most BPL lenders have straightforward broker approval processes. Contact them and get signed up. They’ll provide you with an overview of their products and process. Then you’ll need to develop your strategy for finding clients. Use your imagination. Many lenders have broker toolkits to help. To download our’s, click here.
Mortgage brokers play an important role in the U.S. real estate markets. They are experts on mortgage finance and help connect consumers and investors with appropriate financing products to meet their objectives. On a personal level, you will get out of brokering what you put into it. Work hard (and smart) and you can make a very good living while maintaining a lot of independence.