In a time that seems so long ago, when you applied for a mortgage, it was assumed that you would go to your local bank – the institution where you had your savings and checking accounts – to get your home loan too. I can’t exactly put my finger on when that changed, but we’re in a more modern era now and the process is generally very different.
Sure, banks and credit unions still have a significant share of the mortgage lending market, but a larger share of that market is now occupied by companies whose business is specifically to make mortgages.
As one can imagine by looking at the number of competitors in the market, there is a lot of money to be made for companies that provide or find mortgages for homebuyers, not only on interest, but also on closing costs and other fees. When you look at mortgage companies, there are two basic categories of mortgage originators
The Mortgage Banker and the Mortgage Broker.
Let’s look at the Mortgage Banker first. When you deal with a mortgage banker, you are dealing directly with the company that makes your loan. The term “direct lender” is often used to describe a mortgage banker. The mortgage banker may not be a mortgage servicer, which means that they are not the company to which you make your mortgage payments, but they are the ones who decide if your loan meets the criteria for approval. While a mortgage banker is generally limited to the products they offer to borrowers, many mortgage bankers have relationships with “wholesale” lenders that allow them to negotiate loans if a borrower’s application or borrowing profile does not match their own mortgage offerings.
In today’s mortgage market, mortgage bankers’ underwriters generally make their decisions based on guidelines set by the agencies (FHA, VA, Fannie Mae, Freddie Mac). The professional association affiliated with mortgage bankers is the Mortgage Bankers Association of America.
Next, we will look at the mortgage broker.
A mortgage broker serves the same needs as a mortgage banker, but in a different way. The mortgage broker is not a lender, they do not make the final decision to approve or deny a mortgage application, but they do have the luxury of tapping into a large number of lenders to get borrowers to find the right partner and get approved for the mortgage.
It is not entirely fair to say that using a mortgage broker creates a middleman effect (from broker to lender to borrower) and to assume that this effect results in an additional cost to the borrower. Mortgage brokers are not in the retail lending business. Most direct lenders, i.e., lenders you can access on your own, have a wholesale department whose sole purpose is to handle loans referred by mortgage brokers. These departments are commonly referred to as wholesale lenders and they offer prices that are not available to the public and allow brokers to compete at the retail level with mortgage bankers. I think it’s important to note that on occasion, a wholesale lender will offer exceptionally low prices to bolster their loan pool and a broker may be able to leverage that for you, whereas a mortgage banker would not.
By scanning the mortgage market, both nationally and regionally, a broker knows the specialty of a lender. The broker can identify the lender that might meet a borrower’s particular needs based on an analysis of the borrower’s credit profile. The broker does everything the lender would do – check your credit and employment history, arrange the title search and hire the property appraiser – but once all this information is compiled, the broker selects a mortgage lender who will be most likely to accept the application based on their financial data and unique information. In some offices, mortgage brokers are also lenders.
The primary trade association for mortgage brokers is the National Association of Mortgage Brokers. It is a non-profit organization with a code of ethics and business practices that applies to any broker who wishes to be a member. The association’s website has a section where you can search for a member broker in your area.
Whether you choose a banker or a mortgage broker, you can’t go wrong with this decision in itself. As with anything, the quality is in the people and so it is good, not essential, to ask friends and relatives, especially those who have recently gone through the process, to recommend a mortgage professional.