It is much more than just mortgage rates & saving a few hundred bucks on closing costs. Time could also cost you money.
Mortgage brokers and banks are fundamentally distinct in multiple ways.
A bank “sells” its own suite of loan products direct to consumers.
A mortgage broker has access to 100s of loan products for consumers from banks and lenders. Does this mean they can offer a lower rate?
Not really. And, people shopping for a home loan should think about a variety of other variables such as loan product choices. The decision isn’t so cut and dry when choosing to go with a mortgage banker and a broker.
Loan officer discussing loan options with a young couple
Understanding the difference is the first step to making a good decision. Depending on your situation, the most favorable terms may come from one or the other source.
For instance, many local banks will not offer the popular FHA loan program for borrowers with scores below 620, whereas a broker has access to several banks who offer this program below 580. Fortunately, consumers have access to apply for those lower credit score programs here.
Mortgage Brokers: Are The Costs Higher with a “Middle Man” ?
Mortgage brokers’ most important feature is that they are not working solely for one lender.
They function much like a supermarket which offers, as an illustration, five different types of paper towels from five different companies. The supermarket is not associated with or managed by any company whose product it offers.
Mortgage brokers, similarly, offer loan products to consumers from many different banks.
In return for this service, the lender pays them a commission.
It’s reasonable to conclude that the middle man between the lender and borrower would push fees up. However, that’s not always the result.
The bank’s cost of doing business is lowered with a mortgage broker. In exchange, the bank grants the broker access to interest rates and fees that are very much like what a consumer would get by going into the bank.
So, just because you’re working with a mortgage broker, doesn’t mean you’ll always pay more. Some mortgage companies do so much business with certain banks, they periodically have purchase specials with .25-.375% off the rate.
Advantages Of Mortgage Brokers
For borrowers who don’t fit neatly into a lender’s perfect little box, for one reason or another, brokers may be extremely effective.
They can send your loan applications to banks that are most likely to approve borrowers who have a unique situation. For example, one bank might specialize in condos, another in high debt to income ratios, and another in government loans for first-time home buyers.
But there is a trade-off with the broker model. Mortgage brokers don’t have much control over the speed at which a file is approved, or whether the loan will be approved at all.
However, the bank is using its own employees – loan processors, underwriters, and staff – who are in control of the loan once it leaves the mortgage broker’s office. The broker will check status of the loan and work on any issues that arise, but the final decision is with the bank.
Having said that, banks aren’t models of perfection when it comes to timing. Timing depends on market conditions and staff. Banks and mortgage brokers can be short-staffed. The one thing that gives brokers the nod is they have more of an incentive to close your loan since they are paid on commission. Bank employees get paid whether your loan closes or not.
Do Banks Offer Fewer Loan Products?
Mortgage bankers are also called direct lenders, because they do not work through intermediaries. Their salespeople may be called loan officers, loan agents, mortgage finance officers, or loan consultants.
These employees typically only sell the products offered by their own company, although occasionally banks can “broker out” the loan to another company if they can’t offer it themselves.
A banker’s range of loan products is sometimes pretty thin. Banks offer consumers traditional conventional and government-backed products such as FHA loans, VA, and USDA home loans. However, banks want and prefer a low borrower default rate so they typically have overlays that are stricter than underwriting guidelines.
Occasionally, banks can be more flexible than brokers when borrowers have strong compensating factors like substantial savings. They often create their own products and can be quite creative with their own programs.
Advantages Of Banks
The biggest advantage of using a bank is that your loan officer has more control of the entire process.
If you have a question about a loan you started with a mortgage broker, your loan agent needs to get in touch with the bank’s account executive or underwriter to check status.
Some mortgage brokers who can also bank loans, are able to close certain loans in 15-21 days, so this may not be a huge concern. Banks do have their problems meeting deadlines too, but generally a direct lender has the advantage.
Shop With a Bank and Mortgage Broker For Best Results
The best way to decide between using a mortgage broker or bank is similar to how you would choose for any list of insurers. Ask for quotes from a minimum of one broker and a couple of direct lenders, then go with the broker or bank that offers you the best interest rate, lowest fees, and terms for your circumstances.