In a time that seems so long ago, when you applied for a mortgage, it was assumed you would go to your local bank — the institution where you kept your savings and checking accounts – to also obtain your home loan. I can’t exactly put my finger on the time period where this changed but we are now in a more modern era and the process is usually quite different.
Yes, banks and credit unions still have a large market share for mortgage origination, a larger chunk of market share is now occupied by companies whose business is specifically to originate mortgages.
As one can imagine by looking at the number of competitors in the market place, there is a lot of money to be made by the companies that provide or find mortgages for home buyers, not only on the interest, but also on closing costs and other fees. When looking at companies specializing in mortgage lending, there are two basic categories of mortgage originator…
Mortgage Banker and Mortgage Broker.
When you do business with a mortgage banker you are dealing directly with the company making your loan. Often the term direct lender is used to describe a mortgage banker. The mortgage banker may not be a mortgage servicer, meaning they are not ultimately going to be the company where you make your mortgage payments, but it is their underwriting decision to determine if your loan meets the guidelines of approvability. Although a mortgage banker is typically limited to the products they will offer to borrowers, many mortgage bankers maintain relationships with “wholesale” lenders where they can broker loans should a borrower’s request or borrowing profile not meet their own mortgage loan offerings.
In today’s mortgage market, mortgage banker underwriters generally make their decisions based on the guidelines set by agencies (FHA, VA, Fannie Mae, Freddie Mac). The trade association affiliated with mortgage bankers is the Mortgage Bankers Association of America.
Next we will look at why you should use a mortgage broker.
A mortgage broker serves the same needs as a mortgage banker but in a different manner. The mortgage broker is not a lender, does not make the ultimate decision to approve or decline a mortgage application but has the luxury of drawing from a large pool of lenders for borrowers to find the right match and obtain mortgage loan approval.
To say that using a mortgage broker creates a middle man effect (broker to lender to borrower), and to then assume this effect creates more cost to the borrower is not entirely fair. Mortgage Brokers do not deal in the retail world of loans. Most direct lenders, lenders that you can access on your own, have a wholesale department with the sole purpose of servicing the loans sent in by mortgage brokers. These departments are commonly referred to as wholesale lenders and they offer pricing that is not available to the public and allow brokers to be competitive on a retail level with mortgage bankers. I think it is important to point out that on occasion, a wholesale lender will price unusually low to beef up their pipeline of loan originations and a broker can be in position to take advantage of this for you whereas a mortgage banker wouldn’t.
In scanning the mortgage market, both nationally and regionally a broker knows a lender’s specialty. The broker can identify what lender might fit a borrower’s special needs based upon an analysis of the borrower’s credit profile. The broker does everything the lender would do — checks your credit and work record, arranges for title search and hires the property appraiser — but, once all of this information is compiled, the broker selects a mortgage lender that will most likely accept the application based on its financial data and unique information. In some offices, the mortgage brokers also are lenders.
The major trade association for mortgage brokers is the National Association of Mortgage Brokers The association is a nonprofit organization with a code of ethics and business practices that applies to any broker who wants to be a member. There is a section of the association’s web site where you can search for a member broker in your area.