Loan Approval letters - Mortgage Broker vs. Funding Lender

Managing Real Estate Broker with eXp Realty RB-19250

Over the last few years I have caught heat from mortgage brokers who disagree with my opinion in regards to why it is better to work with funding lenders over mortgage brokers.  I have also gotten a far larger number of responses from real estate agents who from their experiences, agree completely.

In CE classes I teach for real estate agents, I use the following example to differentiate between loan approval letters from brokers and funding lenders.

Mr. & Mrs. Buyer are looking to purchase a home with a $500,000 mortgage.  With my recommendation they contact a loan officer at a local funding mortgage lender.  The loan officer runs Mr. & Mrs. Buyer through the system, reviews their documents and pulls their credit.  It is then determined that Mr. & Mrs. Buyer is right at the edge of qualifying or not qualifying.  So what does the loan officer do next?  The loan officer gets out of their chair, walks down the hall and asks the underwriter to review Mr. & Mrs. Buyer’s file.  At that point, based on the underwriter’s recommendations one of the following happens:

1)    Loan approval is issued for the amount requested.Bob'S Mortgage and Hair Cutting Emporium

2)    Loan approval is issued for a lesser amount.

3)    Loan approval is denied.

4)    Loan approval is issued with conditions (closing a credit card, etc.)

If the letter is issued, it has then been reviewed by the underwriter who will ultimately approve the loan.

Now let’s look at what would happen if Mr. & Mrs. Buyer instead went to Bob’s Mortgage and Hair Cutting Emporium, a local (fictitious) mortgage broker with the same scenario.

Mr. & Mrs. Buyer brings Broker Bob the same documents.  After careful review Bob has determined that Mr. Buyer is either borderline or even worse.  What does Broker Bob do next?

1)    He issues a loan approval letter.

Let’s let that sink in for a second. 

This is the reality of what I see on a regular basis in the real world.  When does the underwriter get to see the file?  I doesn’t happen until towards the end of the process.  That is after the Mr. & Mrs. Buyer have paid for:

1)    The loan application

2)    Escrow / title fees

3)    Appraisal

4)    Home Inspection

5)    Scheduled and possible paid money to the moving company.  And any other expenses and effort to plan the move

6)    They may also have given notice to their landlord that they are moving and will have no place to live if this transaction falls apart.

It is also after Mr. Seller has taken their home off the market and made their moving plans.  They have also incurred expenses:

1)    Survey

2)    Repairs requested through the home inspection process

3)    Termite inspection

4)    Escrow / title fees.

5)    They may also have expenses incurred on a replacement property.

Not to mention the waste time and expenses the real estate agents have incurred.  All because of a bogus loan approval letter.

As a real estate agent representing buyers, I do not tell my clients who they have to use to get their loan.  As a seller’s agent, we have no control over who the buyers choose to work with.   There are a few things we can recommend to our clients to avoid they failed transactions caused by this above scenario.

1)    If the buyer is using a mortgage broker, have them get a loan approval from the funding lender they plan to work through.

2)    Seller’s can either require this or make a condition of their acceptance, that a loan officer from a local funding lender; review the file.

Tip For Home Buyers.  The reason I keep mentioning a local lender, is that local lenders have an advantage over out of town lenders.

1)    They will be there at the signing.  The buyer’s will be signing a stack of complicated documents and they will want the loan officer at the signing to explain what they are signing.

2)    They live, work and play in the area and will want future referrals from the real estate agent.  For that to happen, their level of service has to exceed what an out of state loan offer would give.

Parting Thought.  When a buyer presents an offer on a home, a letter from a funding lender carries more weight with a seller or their agent.  Nobody cares about the broker’s opinion.  They do not approve the loan, the lender does.

For my local friends and client’s, I keep a services directory of vender’s that I and my client’s have gotten great service from.  It is really difficult for a vender to make my list, but they can be removed in 2 seconds.

Posted by



Randy L. Prothero, REALTOR®

Broker-in-Charge, ABR, AHWD, CRB, CRS, e-PRO, GRI, MRP, SFR

eXp Realty

Team Leader - "The Prothero Group"

Randy Prothero is well established as an expert in working with military / VA clients and first time home buyers.  His home seller's (listing) campaign is one of the most aggressive marketing programs in the area.  His luxury home listings sell faster and for more money.

Based out of Mililani, Hawaii. Randy services the island of Oahu (Honolulu County) Performs mediations and ombudsman services for the Board of Realtors.  To improve overall professionalism in his area Randy also offers classes for real estate agents. 

www.HawaiiRandy.comOahu (Honolulu County) Property Search  Hawaii Military Relocations


Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Bonnie Vaughan 09/10/2011 11:21 AM
Lending / Financial
Almost Anything Goes
Bloggers Choice Selections
Century 21 Network
Hawaii Real Estate Professionals
Mortgage, Foreclosure & Elder Abuse Housing Fraud
mortgage brokers
mortgage loan officers
mortgage industry

Spam prevention
Show All Comments
Bill MacBride
Ski-in/Ski-out, Luxury homes, Second Home Buyers - Mammoth Lakes, CA
Mammoth Lakes Resort Real Estate

HI Randy,

Good post.

Being able to walk down to the underwriter's office to get additional review is a big advantage.

Not only for the prospective buyer, but also for the sellers.

Bill MacBride

Sep 10, 2011 07:18 AM #2
Jon Quist
Tucson's BUYERS ONLY Realtor since 1996

What? You mean  that Bob’s Mortgage and Hair Cutting Emporium is not a real company? This means I'll have to find someone else to process my buyers loan. Rats.

Sep 10, 2011 08:15 AM #3
Lenn Harley
Lenn Harley,, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

About 25 years ago, I learned that, if a mortgage company couldn't fund a loan the loan "approval" wasn't worth the paper it was written on.  As a listing agent, the recommendation is made that the buyer get a loan approval from a funding lender.  As a buyer's agent we have to show the buyers the difference.  It's not always easy.  If thy insist on going with a broker, then it's advised that they process a back up loan.  Of course, the the seller doesn't accept an offer financed through a broker, it's moot.  At this point cooperative lenders are losing partners too.  We have never had an offer accepted by a short sale lender or REO owner.  They know the difference.

Sep 10, 2011 08:15 AM #4
Ed Gillespie
WealthWise Mortgage Planning, a Division of American Pacific Mortgage Corporation NMLS #1850 - Folsom, CA

And when the underwriter at the local lender turns down the loan that the loan officer walked down the hall and showed them, then what?  Mr. Funding Lender is out of options for Mr. and Mrs. Buyer.  A mortgage broker may be able to find another lender with different guidelines who will accept the loan.

I am a broker and banker and can only write in my own State.  Regardless of whether I place the loan with my own bank or broker it out, I can always talk to an Account Executive, my processor or someone in Underwriting on any loan scenario that is questionable (and there are no slam dunks anymore!)  It is up to the broker to decline a loan, not the Underwriter.  If a broker is issuing pre-approvals for borderline or worse buyers, it is not becaue they are a broker but because they are not doing their job correctly.

Are loan application fees customary there?  They aren't here.  Are escrow and title paid up front there?  They are not paid here until closing.  So, a buyer is only out the cost of a credit report to get a Conditional Loan Approval after going into contract on a property.  Once they get it, they order the appraisal and inspections.  Perhaps processes are different there.

Sep 10, 2011 08:46 AM #5
Chuck Carstensen
RE/MAX Results - Elk River, MN
Minnesota Real Estate Expert

Buyers really need to have their file underwriten upfront now especially if they are border line with money/credit and so on.

Sep 10, 2011 09:27 AM #6
Niema Thomas
Century 21 Beachside - Alta Loma, CA

This is great information and Buyers should be aware of how this process works. Although laws and guidelines are differnet in California ....where I practice. The requirements of getting a loan through a qualify bank is the same.

Sep 10, 2011 09:36 AM #7
Ray Waisler
Finance of America - Atlanta, GA
NMLS #6621 - Specializing in Jumbo FHA & VA

Randy, I'm afraid you are sorely misguided. I am a Federally Chartered Bank able to write nationally and I have the ability to broker as well. Some of your comments are not only inaccurate, but downright misleading.

For one thing, most underwriting is stationed at an operation center far from the sales areas, intentionally. The days of Countrywide where the underwriter is just down the hall are pretty much gone, for a good reason.

When a deal is in question, it is the MLO's job to run it by the underwriter, whether the underwriter is down the hall or across the country or whether a working for a lender or a broker. It is the MLO's responsibility to draw out and address all potential pitfalls before issuing an approval.  

You are assuming that brokers do not have that option and that is completely misguided and misleading. Most wholesale lenders that brokers use have an area specifically for underwriting questions and scenarios, if an underwriter is unavailable. So the questionable deals always have an ear because the wholesale lenders understand deals that will not close cost precious resources.  

You are also assuming that a lender's MLO will automatically reach out to an underwriter where a broker will not so the implication is the lender MLO is more honorable or simply better at his job. The truth of the matter is it depends on the quality and integrity of the individual MLO and NOT where they are working.

I have seen many crap approvals come from the large lenders lately because their MLO's have been beaten to a pulp and have seen their compensation cut in half or less, so they just don't care anymore. Some will issue an approval to bagel, because the name of the game is now volume.

As for as some of fees you mention, I have never seen a broker charge an application fee, but I have seen many lenders, particularly the big banks charge it among other fees. Broker's fees are always paid at closing as opposed to lenders, who can get away with just about anything these days as a result of recent legislation.

It is your type of attitude that allowed the brokers to be legislated almost out of existence and the results are higher costs to the consumer with the big banks riding rough-shot over the industry since most of their competition has been eliminated. You WILL see even higher costs and higher proportional rates with declining service. The brokers kept the big banks honest.


Oh, by the way, you reference to a broker as Bob’s Mortgage and Hair Cutting Emporium, although you preferace with mentioning it is a fictitious name, it is downright insulting! Oh, and just as a reminder, I AM A LENDER.   

Sep 10, 2011 09:44 AM #8
Jim Poole
Tampa, FL
Zero Down, USDA Purchase Loans, FHA 203(K) Rehab & VA Streamline Loans

Randy every mortgage broker that I know sends a borderline deal to a lenders Rep who then discusses the applicant with his or her underwriter to obtain an underwriters opinion prior to issuing a pre-approval letter. Most every deal mortgage brokers get are borderline deals rather then slam dunk lay downs that anybody who was selling used cars last week could take an application and close a loan for. My clients are real people who need someone who actually knows the business to make purchasing a home possible for them. I respect every Loan Originator out there who has survived the attempts by the federal government and the big bankers to eradicate them from the market as competition. We are still here and if not you wouldn't have any other available options to consider Randy. 

Sep 10, 2011 10:06 AM #9
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

First question, are you related to Tommy?  I'm a Bruin alum from 67-71.

Now, to business.  This discussion is very educational.  On my own listings, I have had many, many more problems with so-called "pre-approvals" that are from mortgage brokers than from direct lenders.  The mortgage brokers above say if depends on the integrity of the mortgage person.  As a listing agent I can't assess their integrity from a "pre-approval" letter presented with an offer.  There are thousands of mortgage folks in Silicon Valley and I know a hand full of them. 

I prefer dealing with direct lenders, but the big boys seem to be under tremendous regulatory pressures.

One question, if all conforming loans are packaged to satisfy FNMA and/or FHLMC underwriting guidelines, why is there any difference in approvals between direct lenders and mortgage brokers?

Sep 10, 2011 11:06 AM #10
Bonnie Vaughan
Scranton, PA
CNE SFR - Buyers/Sellers - Lackawanna & Surroundin

Your article was very helpful.  I've recently seen first hand what a difference there is between the two.


Sep 10, 2011 11:18 AM #11
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Randy - If I have any concerns over whether or not a particular borrowers circumstances will prevent them from getting to the closing table, I don't actually have to get up from my desk and walk down the hall to talk to an underwriter.  I just pick up the phone and call one of my tier one lending sources and speak with an underwriter about my concerns.  Although it may not be the underwriter that gets assigned to my borrowers file, they are a certified underwriter who will gladly address any concerns I may have and let me know what I need to do. 

Did exactly that a few days ago with a prospect who has some challenging circumstances.  It's because I have the ablity to do this that I can service my clients with just about any mortgage need they may have.  It's also the reason why so many others turn to a mortgage broker like me after some large, national, retail bank has totally screwed up their transaction.  It's too bad that you have never had the opportunity to work with a really great mortgage brokerage.

Sep 10, 2011 11:25 AM #12
Wayne L. Brown
Franklin Advantage Inc. - Alpine, CA


I've been on all sides of the fence.  Banker, mortgage banker, and for 10 years now a mortgage broker. I'm sure that I will come across bias, but I have to strongly agree with Ed # 5, Ray # 8 who is also a funding lender, and Jim # 8,and Donne # 12.

It all really boils down to professionalism and knowledge.

To paint a brush and make comments of your nature is one of the things that makes Realtors look like used car salesmen and shoddy attorneys.  That's like saying only use a Realtor who works under one of the Big-Box Brokerages vs. a small local real estate broker.

While I respect your opinion, you are so far off base.  Since you are in beautiful Hawaii, take a nice stroll down to the beach at some point, and really think about what you just wrote.

As the lenders above have mentioned, the big banks along with politicians and their lobbyist have done everything under their power to eradicate we small brokers.  As a NMLS approved lender, I have to endure substantial hurdles just to stay in business while the banks are exempt from many of the rules that I have to follow.

I have dealt and come across hundreds of unscrupulous Realtors in my 30 plus years experience, and for me to say that they are all alike would be a sincere injustice to your profession.

I still contend that size or power of direct lenders makes no difference to me.  As a Pro, I can run circles around them, beating their rates and terms any day of the week.

Lastly, I can get up everyday, look myself in the mirror, smile, and know that what I do helps people because I'm a knowledgeable Pro.  Thankfully, I am still in the position to pick and choose just who the Realtors are that I agree to work with and service their clients.

I wish you and all of your Realtor constituents all the best, and refuse to paint all with the same brush.

You should heed and do the same, but as an individual in this fine Country we live in, you have the right to do and say what you choose just like I do.

Let's clean up Both professions, and act like Pros and good citizens.

What say you?

Sep 10, 2011 11:45 AM #13
William Feela
Realtor, Whispering Pines Realty 651-674-5999 No.

Well, I work with a Mortgage Broker and have had less problems with him than with the local banks I have dealt with in the past year.

But, my mortgagae broker knows that if he screws up I am gone.

Sep 10, 2011 01:40 PM #14
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Randy - I agree with some of what you say, but disagree with others.  I agree that it is important for a mortgage broker to have it run through DU with the lender to make sure the loan approval is actually an approval.  However, I frequently find that those who work for the funding lender have less options than a broker and often prefer the mortgage broker.

Sep 10, 2011 01:51 PM #15
Don Barrett
Integrity Real Estate Services - Idabel, OK

Randy, A well written blog post with good illustrations.  It sounds like you have good local lenders in your area.  

Sep 11, 2011 01:03 AM #16
Kathy Sheehan
Bay Equity, LLC 770-634-4021 - Atlanta, GA
Senior Loan Officer

The real issue here is whether or not the MLO knows the underwriting guidelines well enough to properly pre-qualify the buyer.  

Sep 11, 2011 03:24 AM #17
Randy L. Prothero
eXp Realty - Mililani, HI
Hawaii REALTOR, (808) 384-5645

Jaime – That has been my practice.  I haven’t seen hard money from the brokers in awhile.

Bill M. – It is a huge advantage for everyone involved.

Jon Q. – Sorry to let you know.  LOL

Lenn H. – The REOs here always require they have their loan officer do a pre-qual.

Ed G. – Processes are different.  I have seen many bad loan approval letters.  99% from brokers.  The local funding lenders I deal with, can and do broker if needed.  In that case they go to the funding lender and get underwriting review before issuing a letter.

Chuck C. – Absolutely

Niema T. – That is the same everywhere.

Ray W. – I am not new to this and I am not misguided.  You may only know a few mortgage brokers.  I have seen more bogus loan approval letters from brokers than I can count and so has every experienced real estate agent that I know.  I teach CE classes and you should hear the stories from the agents taking my classes. 

You may have not read my comments carefully.   You are referencing large national lenders.  I have seen bad loan letters and terrible service from them.  I talked about using local funding lenders.  The ones I use do exactly what I said.  They have in-house underwriting.  I think you made my point and didn’t realize it.

Jim P. – Before the cleanout at the end of last year, almost every hair dresser in my state had a mortgage license.  The requirement to get one was $35.  That was it!  No training, no test, no CE, just $35.   You can see how I came up with the name Bob’s Mortgage and Haircutting Emporium.  It was a fictitious name, but a real life scenario.

Lloyd B. – I live on an island with a lot less lenders than you have.  I know almost all of the reputable ones.  If I get a loan approval from someone I never heard of, it usually is a rough ride coming.  The difference between the brokers and the funding lenders is the order in which most of them do the process.  Also the local funding lenders do not put of with nonsense.  Many of the brokers are self-employed and answer to no one.

Bonnie V. – I have seen it a few times this year.  When we required a letter from a funding letter the broker was unable to get one.  So much for their pre-approval letter.

Donna K. – Even in your example, you used an underwriter who may not be the one who approves the loan.  I major step over what most brokers do, but not quite the same.

Thor Funding – You may be good at what you do, but to say the brokers are doing the same job as the funding local funding lenders in most places is so far from reality.  Theoretically a broker can do just as good as a job.  In practice it is not happening day in and day out.  The comments about real estate agents not all being processional is a problem.  The issue there is many are also hair dresser or mortgage brokers who sell homes on the side.  Same deal on our side of the fence.  I have been just as rough on real estate agents when it comes to professionalism.

William F. – That is true of all venders I work with.

Christine D. – My local funding lenders have more options than the brokers.  If needed, they can also broker and usually at a lower fee than I am seeing from the brokers.  I have never had a loan denied, when the local funding lender gave them a pre-approval.  I have seen more bad loan letters than I can count, from brokers.

Don B. – We have several fantastic local funding lenders.  They depend on referrals from agents like me and treat my clients with VIP treatment.

Kathy S. – Knowing and following are also sometimes two different things.

Sep 12, 2011 06:44 AM #18
Ed Gillespie
WealthWise Mortgage Planning, a Division of American Pacific Mortgage Corporation NMLS #1850 - Folsom, CA

Then it sounds like what you are saying is that mortgage brokers don't do their jobs well, to the client's detriment, IN HAWAII.  You would have been well served to make that specific distinction more clearly in your post.  I doubt you have the first hand knowledge to claim that all mortgage brokers in all 50 states should be avoided.  As you stated, processes are different there.  And, as some of the agents responded, in their area, brokers are the better option.

Sep 13, 2011 07:55 AM #19
Randy L. Prothero
eXp Realty - Mililani, HI
Hawaii REALTOR, (808) 384-5645

Ed - With local funding lenders, my clients close and in almost all cases on time or early.  With out of state lenders, it has been a crap shoot.  With out of state brokers, the odds have been terrible.

Sep 13, 2011 10:50 PM #20
Tricia Morris

With the lender overlays that are prevalent in the industry right now, a Good Broker is in a better position to make sure that the loan closes than either a local or a national lender. There are many unforeseen issues that come up during the escrow period. We have been a local funding lender for years. We are also a Broker. We receive multiple late stage loan rejections per month that were with direct local and national lenders and we are able to close them, usually by brokering them. We have not had any escrow fall out and do not write credit approval letters for borrowers who do not close. I don't know what Brokers you are discussing and how they stay in business. but the standards for brokers now are much higher than those for an employee of a lender.  In this real estate market, it is critical to use the highest calibre professionals. This is true whether a lender or a real estate broker.

Sep 24, 2011 04:28 PM #21
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?


Randy L. Prothero

Hawaii REALTOR, (808) 384-5645
Ask me for a free valuation of your Oahu Home.