As you go about your mortgage shopping, checking out deals and offers here and there, you may notice a peculiarity of the people you deal with. Some of them are bankers, others are brokers. Maybe they’ve even got some other invented title, but they do seem to offer some very different kinds of products.
If you’re going the mortgage route alone (or even if you’ve got a Realtor helping you), it’s important — nay, it’s vital — that you understand the distinction between a mortgage broker and a banker. It’s a huge difference that can cost you thousands upon thousands of dollars at closing and may even affect your payments for the life of your mortgage.
Mortgage Broker, Mortgage Banker
Call them what you will, but mortgage brokers and mortgage bankers have very different jobs much of the time. Mortgage bankers help you find a suitable product from the offerings of the bank they work for — the one you’re standing in at that moment. Mortgage brokers, on the other hand, will match you to a portfolio of loans from a range of lenders. Sometimes bankers muddy the waters by brokering some loans, but if they’re working at a bank, they’re still bankers — I’ll explain this more later on.
The reason that it matters — the reason it’s so important to know who you’re dealing with in this world — is that one of these job descriptions can seriously harm you, your family, your credit and your financial future. Mortgage brokers play by a very different set of rules than mortgage bankers do, and while they’re not all bad (in fact, I’m sure there are plenty that are very helpful), a few are walking the thin line between bad and truly evil.
First Up: Your Friendly Neighborhood Mortgage Banker
I’ll admit it, I’m biased. Having worked with both bankers and brokers in my career, I’ll take a banker over a broker any day of the week. Granted, a banker can’t perform the miracles that a broker can, but with hindsight, I think that’s probably a good thing. A banker won’t promise you things that you really shouldn’t be doing, like buying a home with no way to pay for it or with only enough income to pay the interest on the note. In fact, a banker is far more likely to say “no” to a mortgage application than “yes.”
Still, there are a number of virtues that a banker has over a broker:
They’re in it for life. A mortgage banker is someone who often got their start either in real estate sales or somewhere else in the banking system. They’re career folks who have a lot of time and resources invested in building their client base and helping to promote the bank where they’re working. They intend to retire from working as a banker or the VP of a bank or something like that — that means they’re all about doing things right and having long-term visions for the loans they write. They want you to come back and open savings accounts, CDs and other products to support their bank over the long haul.
They don’t work on percentage fees. Most, if not all, bankers are paid a salary to do what they do. Yes, the bank adds a small fee to the loan to cover their expenses (including the cost of your mortgage banker), but the amount that the banker gets from your transaction never changes, regardless of how much interest is charged or how big your mortgage becomes. Because they’re paid a salary, bankers have their clients’ interests at heart — there’s no financial incentive to push through half-baked deals.
They’ve got more rules. Both mortgage bankers and mortgage brokers have to obey the law, that’s absolutely true. But unlike mortgage brokers, mortgage bankers are also beholden to the bank that employs them. So, not only can’t they do things that are illegal, they also have to answer to breaches of bank policy as well. It might not seem like much, but I’ve known plenty of mortgage brokers who were one man operations, meaning the only rules they had to follow were those they put in place themselves. When you’re dealing with other people’s financial lives, relying solely on your personal moral code doesn’t create as much of a safety net for the guy in the hot seat.
Last, But Not Least: The Mortgage Broker
Like I said before, I know I’m a bit biased against mortgage brokers, but there is good reason for that. As I stated above, mortgage brokers run the gamut from being totally honest and reputable to being the absolute scum of the earth. The problem is that it’s hard for a home buyer, who may only deal with one or two mortgage professionals in their lives, to tell the difference.
Personality aside, there are a couple of drawbacks to using a mortgage broker, even the most angelic. These are:
They often cost more than bankers. Broker expenses are typically built into the loan fee structure. An extra large origination fee here, a loan processing fee there and before you know it, your closing costs are double what they’d be with a banker. Since many first time homebuyer products strictly limit the types of fees a lender can charge, brokers usually don’t mess around with them because they’re not profitable enough.
Once your loan closes, they’re done. Yes, many banks will sell your loan off somewhere a month or so after closing, but that doesn’t mean your banker is done at that point. They can often track down problems and assist with loan-related questions despite the change in servicer. On the other hand, brokers make their money in volume — so if you come back after closing with questions, the chances are good you’ll be brushed off.
Despite these indisputable problems, brokers can offer temporary solutions to serious problems, giving borrowers access to less than perfect credit loans and exotic mortgages that can be helpful in very specific sets of circumstances. If you need a temporary loan to help you get to a permanent loan for whatever reason, a broker can make that possible, where a banker is more likely to deny you outright.
If you must borrow using a broker, do so with caution. The man (or woman)’s character should be on trial as much as the loan programs they’re offering. Do they seem honest? Do they answer your questions in language you can understand? Will they take their time with you or are they impatient with your situation? Biggest of all, though, is whether or not they’ll give you loan information in writing so you can shop your loan around.
If they’re helpful, patient, speak to you in English and are willing to document everything they already said, you’ve probably got one of the good ones. This is great news, but you’re not done yet. Different brokers have different relationships with various banks, which means that even though the best Broker-A can get you is a 5/1 ARM with an intro rate of 4.5 percent, Broker-B might be able to manage a 10/1 ARM with an intro rate of 4.0 percent. So, even among brokers, it’s good to shop around.
When Bankers Become Brokers
Sometimes, your friendly neighborhood mortgage banker will be capable of brokering a loan, too. Don’t go running and hiding, this doesn’t mean your favorite lender has turned into a villain. Usually, when a banker is capable of making both in-house loans and partnering with another bank to make loans elsewhere, it works out better for everybody.
For example, some banks will only lend their own money to the best borrowers. They don’t care what extenuating circumstances you have, how much money you’re bringing to closing or how many co-borrowers you can find — if you look remotely difficult, they don’t want to fund. To make up for this general in-house attitude, they’ll partner with other banks who will make those trickier loans.
In these situations, brokering takes on a whole new meaning. Your banker is still functioning as a banker, just for more than one bank. They’ll write both their own loans and their partner bank’s loans and be able to approve you for whichever product is best for your situation. They’re still being paid on salary and behaving as a banker in all other ways.
These bankers may offer to counsel you to help improve your financial situation so you can apply again for the original loan you were denied, but if you simply don’t have the time for that, they usually can find a product that will meet your needs.
The Bottom Line: Most of the Time, You Should Stick with Bankers
I know that brokers can sound very appealing and often make offers that seem too good to be true, but most of the time their deals can be matched or surpassed by a mortgage banker. However, there are a few situations where a broker can be your friend, provided you vet them thoroughly and ensure that they’re really in the business to be helpful and not to make a quick buck.
When you can’t wait to secure a more traditional loan due to funding, emergencies or whatever life’s throwing at you, a broker can twist and bend his way through loan products you didn’t even know existed. They can often find you a loan from their catalogs in circumstances where bankers would assume you didn’t stand a chance. That being said, you’ve got to make sure that you know what you’re getting into, what work you’ll have to do to recover from your issues and really commit to doing it when you’re dealing with a broker.
For example, if your broker gets you an adjustable rate loan to buy a small home when you’re suddenly being transferred across the country, make sure you know exactly when the loan will adjust, how much it can adjust to and how long the term of the loan is. Find out if there’s going to be a balloon. And then work as hard as you can to sell the old house so you can refinance that loan before you ever have to worry about any of those things.
Another situation that I saw frequently where a broker was a huge asset involved divorcees. Divorces are notoriously hard on your credit, so sometimes you don’t come out smelling very nice or with very good credit. If you’ve still got to provide a home for your kids or your elderly parents who are living with you, despite your credit woes, a broker can often help. Again, the same rules apply, though. Get all the details and then refinance as soon as possible.
I don’t want to give you the impression that what a mortgage broker has to offer is total junk — because that’s simply not true. However, if you compare the fees you’ll pay using a broker to the fees for the same Conventional loan using a bank, rare is the case where the broker saves you money. Using a broker for easy prime lending simply makes no sense. Even if the broker isn’t marking up the loan, they’re acting as a middleman between you and the bank — that scenario always adds more layers of fees as well, no matter what trade you’re in.
My advice do you, gentle readers, is to go to your bank first and if they can’t help you, give the broker a shot. Don’t do it the other way around.