When I bought my first home I was not yet a mortgage loan originator, and I did not go shopping for mortgage rates.  I went with a loan officer that I knew and trusted, which is what most people do.  The loan officer I used for my purchase worked for a state-wide bank in Illinois, she did a great job and I referred my real estate clients to her.  However, as time passed she grew more and more frustrated with her work environment and the limitations that her bank placed on her; she did not feel like she could compete in the aggressive marketplace.  She eventually moved to Florida and became a loan officer for a mortgage broker.  I called her shortly thereafter and she said that she loved working for a broker, she could offer her clients more options and savings.

Do you know the difference between a mortgage banker and a mortgage broker?  Do you know the strengths and weaknesses of each?  If not then read on...

The common perception of mortgage bankers is that they are reputable, yet rigid, and that of brokers is that they are shady, but flexible.  There is some truth and fallacy in both of these opinions.  The truth is that banks and brokers are governed by the same federal rules and regulations when it comes to the practice of mortgage lending.  There are, however, different regulations and requirments for establishing and maintaing a business as a bank or mortgage brokerage.  Since a brokerage most often does not fund their loans with their own money it is much easier to open a mortgage brokerage than to open a bank.

A mortgage brokerage is a business that brokers loan products from wholesale lenders, many of these lenders are the same banks consumers can go to directly to get a mortgage.  If a consumer goes to a bank to get a mortgage they will be offered the banks loan products with retail interest rates.  A broker contracts with multiple banks to distribute the same mortgage products except they are allowed to sell these loans at a wholesale rate.  Does this mean that if you go to a broker you will get a better rate than at a bank?  Not necessarily, whether you go to a bank or brokerage there are three factors that will impact the type of deal that you will get: 1. your qualifications, 2. the mortgage products being offered, and 3. the integrity of the loan officer/institution you are working with.

As a consumer it is difficult to know whether or not you are getting the best deal possible.  The best advice I can give you is to make sure you trust your loan officer, and to make sure they are able to give you what you want.  Let's consider the loan officer you are working with, does he or she work with a bank or a brokerage?  A bank employee is going to be loyal to their employer first, as all good employees should, and to their client second.  In other words, they have a specific product catalog they can work with, and if you qualify for one of their loans they are going to try and sell it to you.  If there is another loan product that would better suite your situation at bank A, B, or C down the road they are not going to send you to their competition.  However, a loan officer at a mortgage brokerage does not have a specific responsability to any one bank, they are only expected to do business within the terms of their contracts with each bank that they broker.  Assuming they are a reputable brokerage they will have long standing relationships with multiple, reputable banks and lenders, and they can offer you many more options in loan products and interest rates.  It's definately more convenient to shop at a brokerage, than to go from bank to bank on your own looking for products and rates.

Now before you jump on the mortgage broker train you do have to consider the other side of the coin.  Since the requirments of opening a mortgage brokerage are less than that of a mortgage banker there are naturally more highly suspect mortgage brokers out there.  Predatory lending has been a huge problem over the past decade.  The complexity of our services and wide variety of mortgage products available has made it very easy to put borrowers into mortgage products that they should not be in.  Like I said, it's hard for consumers to identify the quality of the deal that they are getting.  State and Federal laws have made big steps towards regulating both mortgage brokering and banking, but consumers do still need to take caution.  Unless you have a personal relationship with your loan officer and explicitly trust him or her you should take a couple precautious steps before closing your purchase or refinance.

STEP 1- Understand the costs and fees associated with your mortgage: Probably more than anything, this will help you identify the integrity of your loan officer and/or lending institution.  After you complete your mortgage application you are required to receive a copy of specific disclosures and documents that you signed.  One of these documents is the Good Faith Estimate, make sure you examine this document closely and ask for an explination on anything you do not understand.  Many times a mortgage broker will be paid a commission from the lender that funds the mortgage, and on the Good Faith Estimate this would be listed as a Yeild Spread Premium (YSP).  Mortgage brokers and banks can also get paid by charging the borrowers a loan origination fee or a mortgage broker's fee.  There will be many other charges on this Good Faith Estimate that are completely out of the loan officers control, but pay attention to exactly how much the loan officer or brokerage is going to get paid.  If there is a significant Yield Spread Premium and a loan origination fee I would advise you to either elect a lower interest rate which pays a smaller YSP or negotiate down the loan origination fee.  If your mortgage originator is getting paid a fair amount from the lender funding the loan it is not necessary to charge the borrower a fee on top fo their commission.  

STEP 2- Ask Questions: Unless you are an active practioner in the this industry there will be many documents and figures that will be very difficult for you to understand.  Please, for your sake, ask your loan officer questions about your options, products, and the documents you will be signing, and expect to get answers.  If you are not sure about what you are doing, wait until you are sure.  If your loan officer hesitates to give you answers, does not return your calls, or gets put off by your questions it is a good indicator that there could be a problem.

None of this was intended to offend mortgage professionals, rather to offer advice to consumers.  The majority of brokerages and banks are reputible businesses, it is the minority that takes advantage of their clients and makes life more difficult for everyone.  Nevertheless, it is always better to be safe than sorry.  If you have any questions or comments I would love to hear them and I'd be happy to give you my time and knowledge.

-Ethan Van Eck- Real Estate Broker & Mortgage Loan Officer