There are two questions that always haunt home buyers: What should I go for; a mortgage broker or a bank? Let us take a look at the differences between both, their functionalities and limitations.
An individual if asked this question would always have a one-liner ready: “whoever gives me a good deal is the best”. But at the back-end there are several matters involved, other than just getting a ‘good deal’. In some cases individuals hunting for a ‘good deal’ usually end up being overcharged.
The main difference between both is that a mortgage banker, also termed as a mortgage loan officer, lends the bank’s own money to the borrowers. The loan officer takes the application and works out a home loan that suits the requirements and obligations of the borrower. The application is then forwarded to the loan officer’s employer – the bank – which after considering credit standings and repayment capabilities underwrites the loan at their rate and terms.
However, a mortgage broker doesn’t own the responsibility of the capital involved. They just act as an intermediary between lenders and borrowers, and charge a fee against it. People looking for loans usually set brokers second on their priority, except for those who are already turned down by banks due to bad credit ratings or tricky mortgage scenarios.
Here is a comparison of mortgage brokers and banks with respect to their functionality and effectiveness:
| Pros of working with a bank | Cons of working with a bank |
| More trustworthy & accountable | Mortgage process is lengthy and sometimes bureaucratic |
| Offer better rates (some cases) | Banks do not disclose the yield-spread premium |
| Add mortgage to existing accounts and make direct payments from there | Conservative loan programs |
Pros and Cons of working with a Mortgage Broker
| Pros of working with a broker | Cons of working with a broker |
| They do the legwork for you, comparing the wholesale rates of a large number of banks and lenders | There is a possibility of making mistakes |
| Wholesale interest rates can be lower than retail (bank branch) interest rates | False Promises |
| Handle tricky mortgage scenarios | May overcharge via yield-spread premium |
| Easier to get in contact with, less bureaucratic | May not have enough access to some of the bank programs |
On basis of this comparison, which is more preferable for home loan financing in an environment where all other factors such as credit ratings and amount of loan are constant. Feel free to share your views on this. If you have a case of your own, you are most welcome to discuss it.
Tags: home loans, Mortgage Banks, mortgage brokers, Mortgage Industry
Sorry but your comparision is incomplete. The choices for the consumer are; mortgage broker, mortgage banker & banker. This distinction is critical in today’s environment since mortgage bankers and brokers must be licensed under federal law whereas bank loan officers need only be registered.
Mortgage bankers & brokers traditionally had more options for the consumer while most banks had a relatively limited menu. While a bank has multiple income streams to rely on, a mortgage banker or broker makes money only one way; making mortgage loans.
The new Good Faith Estimate disclosure which was implemented on Jan.1 has made it tougher on mortgage brokers (actually more confusing for a borrower to compare a broker vs banker). In addition, the implementation of HVCC last year puts greater limitations of choice when dealing with a broker.
I have been in the business 23 year and I believe the recent reguations have only made it more difficult for the consumer to compare and have resulted in fewer lending options. The SAFE Act will get rid of marginal loan officers in the mortgage banking and brokerage environment but it unfortunately does not apply to bank employees.
Sorry, I messed up here. I should have referred to “depository institutions” otherwise I minimize the role of credit unions in the lending environment. Credit unions play an important role and I should have recognized them rather than just mentioning banks.
If a mortgage broker can truly act in the best interests of the client, and put their own interest second, then I’d say, go ahead. However, too many brokers (of all sorts) don’t do that. They’ll do whatever it takes to generate a commission or fee, or get a higher one. Suffice it to say that the business of being a broker has fallen into disrepute. Just look at what’s happened to the stock brokerage business. These days, I’d never consider a traditional broker. All of my stock transactions are through a discounting firm.
Therefore, unless someone can demonstrate exactly what benefit I can get from doing otherwise, if I have a choice regarding a mortgage, I’m going to the bank first.
As a realtor I have found that “mortgage bankers” and “bankers” are less likely to over promise and under deliver than “mortgage brokers”. This stems from them having more control and a closer relationship with the in house underwriting and processing departments. More functions being done “in house” leads to more control. “Mortgage brokers” take a loan application and then send it off to another financial institution for underwriting and processing.
There are several factors to consider when searching for a home loan, but, in my opinion, those that fall closest to the bottom line are the rate and terms of the loan, and the costs associated with obtaining the financing. Loan originators, whether bankers or brokers, are compensated based upon the loan amount and note rate for the loan, paid as a percentage of the loan amount.
Bankers have access only to the programs that are offered by their employing financial institutions, and many times are limited as far as rates and closing costs that they can offer to a borrower.
Brokers have access to multiple lenders and can offer pricing and programs that are better suited to a borrowers’ individual needs, credit profile, loan-to-value ratio, and other factors involved in underwriting and approving loans. In addition, brokers can be more flexible in pricing to enable borrowers to obtain loans with less out-of-pocket expenses.
It is always best to compare multiple offers when shopping for a loan, and to carefully review the Good Faith Estimates and Truth in Lending Disclosures offered by your prospective lenders to ensure that you are getting the best deal.
Sincerely,
Kristi Kertin
888/627-2002
I think there is a key point missing here and that is the relationship the lender has with the realtor or the customer. I have plenty of clients who are willing to pay a little more on the interest rate to know that they will be dealing with me instead of someone they don’t know. People want to do business with people they know and can trust, most are willing to spend a little extra for this.
As a Realtor, when I am acting as a Buyer’s Agent, I give a list or “contacts” for obtaining a mortgage loan. My client may ask why I have a variety of option: traditional banks, S&L, Mortage Broker, etc. They often ask questions about the different types of lenders. I explain them & can say I have had dealings with each one or they would not be on the list. I suggest that they may shop if they like. My part of the process is to work closely with the lender my client selects.
Mortgage Brokers. Well those that can demonstrate that they are truly working in their clients best interests.
I do this by advising my clients how to become mortgage free earlier, saving them lots of money that in the form of interest charges would only serve to line the pockets of the lender otherwise.
I believe that when I can provide this kind of a benefit, clients will be more than happy to refer their friends, family, and colleagues to me. I’d rather build my business this way than at the expense of my clients (earning fees from continuously keeping them in debt).
All mortgage brokers won’t support this kind of a strategy. But can ANY loan officer representing the lender even consider doing something like this? I doubt it.
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Rachel:
I have been both a bank loan officer and an independent mortgage broker (as well as an underwriter, compliance officer and quality-control supervisor, but those are other stories for other days).
No matter how good a bank loan officer is – and I put a mortgage banker into the same category – all that person can offer is that institution’s product line.
As a bank loan officer I passed on numerous good transactions (usually referring them to other sources) simply because my bank didn’t offer SBA or didn’t loan to non-profits or wouldn’t consider a gas station as collateral. There was nothing wrong with the deal – we just didn’t offer that loan.
This can be true for residential lending, as well. We just closed a $2.45M rate & term refinance secured by a single-family residence (a condo). We saved our client over $3,000 a month.
A mortgage broker, however, offers a wide variety of programs – because we can work with a wide variety of lenders. Do we need to add value to the deal? Of course. If I don’t think a borrower will be better off after the deal closes I won’t take it on. Never have and I never will.
Do we need to be honest? Of course. I don’t think bankers, mortgage bankers or mortgage brokers have a monopoly on ethics. Some are better than others.
I suggest consumers shop around – why not speak with both? I have no trouble with a client trying to do better – what’s wrong with that? I do ask them to be upfront about it. If they have an offer on the table I’d like to know about it. If I can’t beat it we can both save time.
If you want a very good cheeseburger and fries go to In N Out and that is what you’ll get. If you want soup or a salad, a steak or roast chicken, and maybe some dessert, a restaurant with a more extensive menu will be a better choice.
Most banks and mortgage bankers, in the end, have a limited menu from which the consumer can choose. Mortgage brokers tend to have far more offerings.
As to relative cost? In my experience everyone in business gets paid – or they go out of business.
As a Realtor, I like to have both Mortgage Brokers and Bank references for my client/buyers. I would not refer anyone who I did not think was ethical and who do a good job for clients.
The advantage Mortgage Brokers has had is the access to more products to meet the needs of different buyers. However, in todays market, some REO’s request clients be prequalified with the institution of thier choosing. I have seen others require direct lenders only. Making it more difficult for mortgage brokers to compete in the market. I find the costs are comparable. I am always willing to sit with a client and show them how to read thier GFE.
I vote for Savings.
think you have missed an important distinction between the two in that mortgage brokers have the option to “shop” many different lenders. If the bank’s underwriter denies the loan, it’s done! However, with a broker, if a loan is denied by one lender, there may be another lender, with more leinent guidelines, that will approve the loan.
Now that mortgage brokers must now all be licensed, bonded and criminal background checks, they are much more knowedgeable (and credible) than loan officers who work for banks.
In fact, one of the “suggestions” out there (with the new licensing laws) is if you can’t pass the test or the criminal background check, those LO’s who can cut it should go work for a bank instead. To be fair, they will probably have to pass the bank’s background checks, but I’m sure the bank does not test to see if they really know their stuff. Karen Deis.
http://www.MortgageCurrentcy.com
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