When you need a mortgage to buy or refinance a home, there are 3 main ways to go about applying — through a traditional brick-and-mortar bank, an online lender or a mortgage broker (either in-person or online).
Many people first think about shopping for a mortgage where they already have their checking and savings accounts, which is often a major bank or a local credit union. And applying online with a traditional bank or online-only lender has become more common.
But while borrowers are probably the least familiar with using a mortgage broker, it comes with many benefits.
Here’s everything you need to know about using a mortgage broker.
Working with a mortgage broker
A mortgage broker connects a borrower with a lender. While that makes them middlemen, there are several reasons why you should consider working with a broker instead of going straight to a lender.
For starters, brokers can shop dozens of lenders to get you the best pricing, says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and mortgage advisor with C2 Financial Corp. in San Jose, California.
Fleming says the price he charges for certain lenders or banks is very often better than the price a consumer could get by going directly to the same lender.
“When the lender outsources the loan origination and sales function to a broker, they offer to pay us what they would otherwise pay to cover their internal operations for the same function,” Fleming says.
“If we are willing to work for less than that—and that is usually the case—then the consumer’s price through a broker ends up being less than if they went directly to the lender,” he explains.
Further, “A broker is legally required to disclose his compensation in writing — a banker is not,”says Joe Parsons, senior loan officer with PFS Funding in Dublin, California, and author of the “Mortgage Insider blog.”
Variety is another benefit of brokers. It can help you find the right lender.
“Some may specialize in particular property types that others avoid. Some may have more flexibility with credit scores or down payment amounts than others,” says David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York and the editor of REFinBlog.com.
In addition, brokers offer one-stop shopping, saving borrowers time and headaches.
“If you are turned down by a bank, you’re done — you have to walk away and begin again,” Fleming says. But “If you are turned down by one lender through a broker, the broker can take your file to another lender,” he adds. The borrower doesn’t need to do any extra work.
A broker’s expertise and relationships can also simplify the process of getting a loan.
Brokers have access to private lenders who can meet with you and assess whether or not you have the collateral, says Mike Arman, a retired longtime mortgage broker in Oak Hill, Florida.
Private lenders, which include nonbank mortgage companies and individuals, can make loans to borrowers in unconventional situations that banks can’t or won’t because of Dodd-Frank regulations or internal policy.
You may get a better price on a loan from a broker as well.
Under the Consumer Financial Protection Bureau’s Loan Originator Compensation rule, brokers (but not bank lenders) must charge the same percentage on every deal, so they can’t raise their margin “just because” like a bank can, Fleming explains.
“The intent was to prevent originators from steering borrowers to high-cost loans in order to increase their commission,” Fleming notes.
You should also know that working with a broker won’t make your loan more expensive.
“The lender pays us, just like a cruise line pays a travel agent,” Fleming says.
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Working with a traditional bank lender
Banks issue less than half of mortgages these days, according to the industry publication Inside Mortgage Finance. But working with a broker isn’t necessarily a slam dunk.
“A broker may claim that he offers more choices than a banker because he works with many lenders,” Parsons says. “In reality, most lenders offer pricing on their loans that is very similar.” Although, he notes, a broker may have available some niche lenders for unusual circumstances.
Reiss says that even if you’re working with a mortgage broker, it can be worthwhile to check out lenders on your own since no broker can work with every lender — there are simply too many. He suggests starting with lenders you already have a relationship with, but also looking at ads and reaching out directly to big banks, small banks and credit unions in your community.
It’s important to know your range of options, he notes.
For the same reason, you might want to shop around with a few different brokers.
Arman says that Dodd-Frank rules make it “almost impossible to qualify for anything other than an absolutely plain vanilla loan” at a bank.
Loans that are guaranteed by the Federal Housing Administration or Veterans Administration, and loans that are sold to Fannie Mae or Freddie Mac, must meet strict requirements to prevent Uncle Sam from getting stiffed by bad loans.
According to Arman, you’re more likely to be turned down at the local back if:
- You have any title problems, credit problems or are self-employed.
- You are a foreign citizen.
- The house is the least bit unusual and doesn’t appraise high enough.
- You are half a percent off on your debt-to-income ratio.
- You have anything other than a completely conventional nuclear family.
- You have changed jobs recently.
- You have moved recently.
- You have applied for a credit card recently.
But Fleming points out that working with a bank can sometimes be faster than a broker. The loan processing and underwriting is usually done in-house and banks generally have fewer overlays (additional restrictions on lending guidelines). That means banks may be a little more likely to approve a loan that just barely meets guidelines, he says.
Banks usually sell the mortgages they issue to Fannie Mae or Freddie Mac after the loan closes. Fannie and Freddie have minimum requirements for borrower characteristics like credit score and debt-to-income ratio. If Fannie Mae says a borrower’s minimum credit score must be 620, a lender can choose a higher minimum, such as 680.
Also, unlike brokers, banks have flexibility on pricing, Fleming says. They can reduce their price if they have to compete. But that means they can also raise their price.
The bottom line
As with any product or service, shopping around for a mortgage is always a good idea. Whether you decide to go with a bank or mortgage broker depends on your financial situation and personal preference.
Remember, before committing to a loan with a banker or a broker, make sure to get an itemized estimate of fees.
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