Mortgage Broker vs Mortgage Banker -- What is Better for You?

Mortgage Broker vs Mortgage Banker –Which is Better for You?

This question is one that all those looking for a Home Mortgage should be asking themselves. What is the difference and how can you be sure?

The consumer who is not aware of the difference between a mortgage broker vs a mortgage banker may end up paying dearly in costs and even interest rate on a mortgage. Most people just assume that a mortgage company is a bank that lends their own money. This is not the case.

When shopping for a mortgage, you will have to make a decision of mortgage broker vs mortgage banker. The difference is simple.

Mortgage Broker vs Mortgage Banker – the difference

A mortgage broker is a middleman between you and the lender. He/she will meet with you and do a credit analysis to determine what type of lender may be the best fit for your kind of mortgage.

They then shop your loan around with different lenders and once they find a match they submit the file for approval by that lender. Many of the lenders that mortgage brokers work with do not deal direct with the public. They are “wholesale lenders” as the market calls them.

Now if the lender that the mortgage broker has matched you up with approves your loan, the broker will give you this information second hand so to speak. You will not see an approval letter from the lender. You may get one from the broker, but it is not a loan commitment.

The pre-approval letter works in most cases with realtors, sellers and so forth. However, it’s still a piece of second hand information.

Mortgage Broker vs Mortgage Banker - Behind the Scenes

When comparing a mortgage broker vs mortgage banker you should consider what may be going on behind the scenes.

The mortgage broker is being solicited by “wholesale lenders” everyday. Each “wholesale lender” has account executives. Their job is to make contact with mortgage brokers to get them to use their products.

Just like at Wal-Mart, there may be a sale that month and the mortgage broker can make more money on your loan if they use that particular lender.

So what do you think they may be inclined to do?? Yes, they may have your loan priced out by them and it might be switched over without you even knowing about it. After all, they are a broker and they want to make the most money. That's why its important to consider the difference between a mortgage broker vs mortgage banker.

The broker gets paid for brokering the loan with a lender. Often times the lender will pay them a Yield Spread Premium in addition to some other fees.

The broker collects fees from you the borrower and the lender. There are loan origination, discount, broker, processing, underwriting, administration and even a few other fees. All of these add up and cost you more in closing costs.

In the end, the mortgage broker does perform a service. However, sadly, many brokers have gotten involved in “predatory lending”. Predatory lending has cost consumers billions of dollars and some have lost their homes because of it.

I’ll save that topic for another article. Just realize that mortgage brokers in many states have to be licensed, but the representative who handles your loan does not. They may be operating under the broker’s license. In fact, some states may not even require that the broker get licensed.

It’s important for you to check them out if you’re planning on doing business with them. Since they are not highly regulated like a bank, you may find many of them here today and gone tomorrow.

Check with your local Better Business Bureau. Ask for referrals from realtors and others so you can check them out.

Mortgage Broker vs Mortgage Banker - One Other Word of Caution

Once again, because of the lack of regulation in the mortgage broker industry, there is a great deal of deception going on. Some employees (not all) will use bait and switch tactics so they can get your business. They may promise you a low rate, low closing costs etc. and when you go to close everything is different.

I cannot tell you how many times I’ve heard horror stories along this line. Listen to your common sense. If it sounds too good to be true, it usually is! When dealing with brokers, there’s a little saying: “The customer ends up doing business with the biggest liar in the game!”

Insists on obtaining a Good Faith Estimate and Truth in Lending form. All your figures will be on these forms and they should be the same ones you see at the closing table or at least within a few hundred dollars. The interest rate should be exactly what you applied for.

Some brokers have added more to their fees just before closing, and you are not aware of it. Once again, they are not concerned about compliance since their not regulated.

Ask if your rate has been locked shortly after filling out your loan application and getting copies of these important forms.

Again, because the broker (or his employees) makes more money on the Yield Spread Premium they may not lock your loan right away hoping to make more money.

In some cases, because you’re dealing with the mortgage broker vs the mortage banker, they cannot even lock your loan until its “Clear to Close”. The lender does this to protect themselves from market fluctuations.

They may try to honor the rate quoted, but if the market moves against them, guess who’s going to get stuck with the increased rate? You are, because the broker does not want to lose any money either. They just tell you that rates have just increased.

Mortgage Broker vs Mortgage Banker – the difference

Remember in the beginning I told you I’ve been on both sides of the fence? I started out as a mortgage banker. After about 3 years I jumped over to mortgage broker. Then 6 months later, I went back to the mortgage banker side again.

Why would I do such a thing? I was tempted by greed. I was offered more money than what I made at the bank.

Even though I could now charge customers more money, I just could not do it. It just did not feel right. At the bank I was capped on how much I could charge the customer. Even though we had a cap on what we could charge I would rarely hit the cap anyway.

Then when it comes to reputation, well the bank offered much more name recognition than any broker does. Because the bank was an FDIC bank, this gives a certain prestige not found in any mortgage brokers.

Being an FDIC lender means that I could do residential and commercial mortgages in all 50 states. Most, if not all brokers are limited because of the work involved in getting licensed in all 50 states.

Mortgage Broker vs Mortgage Banker – the real benefit to you

Besides being federally regulated and an FDIC lender, the mortgage banker also has a large product line at his fingertips. FHA, VA, Conforming and even Non-Conforming. This is important to you when it comes to getting your new home loan.

Most large banks have a few hundred different products. The loan officer that you end up working with will have been trained on how to discover and sell the product so it’s best for you the consumer. So if you're in a trying to decide whether to pick a mortgage broker vs a mortgage banker, the mortgage banker may be your best bet.

Furthermore, the loan officer goes through yearly training on “Fair Lending Practices” which is a safe guard for you. In this training the bank outlines the Federal Laws on avoiding “Predatory Lending” and how to be fair to all consumers regardless of age, sex, race or creed.

Also, the fees are often much less when working with a direct lender. Since they are lending out their own money, there is no middleman. So you save money in closing costs also. Another good reason if deciding between a mortgage broker vs a mortgage banker, to choose the loan officer that works with a bank.

Mortgage Broker vs Mortgage Banker – the last benefit to you

Remember the bait and switch routine? The last minute rate locks?

With a mortgage banker, they cannot use these deceptive tactics to get your business. You could report them to the FTC if they were caught, huge fines can be imposed on the bank. The loan officer will end up losing his/her job.

Also, when it comes to the point of loan application, the loan officer has 3 days to compliance your file per Federal Law. This means you are to get a Good Faith Estimate, Truth in Lending and other RESPA documents.

You will be made aware of the interest rate to expect at closing. You should be given the opportunity to “float” or “lock” your loan. If you chose to lock it, it will be the exact rate at closing if the loan is closed within the lock period.

Beside all of the above, working with a mortgage broker vs mortgage banker you will find the bank is well established and has all kinds of safeguards in place to protect their reputation and you from “predatory lending practices”.

Or return to First Time Home Buyers home page.