Mortgage Broker or Mortgage Banker - What's the Difference?
Mortgage Broker or Mortgage Banker - Know the Difference to Save Your $$
I constantly see across the socials loan originators (commonly known as loan officers) that categorize themselves incorrectly. This leads to the average consumer misunderstanding the difference. Understanding the difference and your needs could save you money.
A mortgage broker is independent and does not work specifically underneath a direct lender. While their mortgage license is sponsored by the mortgage brokerage business, the underwriting and funding of the mortgage loan is done thru a wholesale lender.
A mortgage banker is a company that underwrites and funds the mortgage loan. This means the loan is processed, underwritten and closed thru the same lender that the loan originator works with.
What is the Difference to the Borrower?
Under the Dodd Frank bill a mortgage broker needs to be compensated the same percentage for any loan that the mortgage broker sends to a wholesale lender. The terms of the loan may not allow for the compensation to change. The compensation that the mortgage broker is contracted to receive with each wholesale lender is 100% transparent to the consumer. Also, a mortgage broker may only be paid directly by the lender or by the borrower - not a combination of both.
This means the borrower decides if they will pay the mortgage broker for their services or if they would like the lender to pay the broker after funding of the loan.
A mortgage broker has the ability to shop terms from any of the wholeslae lenders they are contracted with. This means on a daily basis, any of the lenders may be selected based on terms and service levels or program. This is a cost savings to the consumer in two ways - rate and closing fees.
What's the Rate?
Lenders use the margin they charge as the faucet for loan inflow. On a daily basis they monitor capacity and change their internal margin to bring in more applications or slow them down. This means a mortgage broker looking out for the best terms for the client may choose one lender over another on a daily basis. This saves the borrower money over the life of the loan.
Independent mortgage brokers also have the ability to operate efficiently as a model. The more efficient the mortgage broker operates, the lower their contracted compensation could be resulting in better terms for the consumer. Mortgage brokers generally do not have layers of management and infustructure that mortgage banking operations do.
A mortgage bank also calcuates their margin to cover the cost of the operation - infastructure, personnel, compliance and other costly expenses. The mortgage bank is able to set their margins specific to loan program, credit score and other variables. This means depending on the loan and it's characteristics, a consumer can be paying more in margin without knowing as a bank does not need to be nor will it be transparent with the margin on a specific loan. Margins also change from loan officer to loan officer and branch to branch depending on compensation levels to your specific LO. Therefore, if you do business with Mary Loan Officer at ABC Mortgage you can be charged a higher rate than dealing With Billy Loan Officer at the same firm based on their compensation package. This is where a mortgage loan may be quite a bit less expensive over the term of the loan.
Circling back to the way a broker is able to be compensated is what saves the borrower money in fees. Because the broker can only be paid by the lender or consumer - consumer's choice - the broker may not charge ancillary fees such as processing or other such extra charges. Closing fees when using an independent mortgage broker are limited to third party fees that are needed to underwrite and close the tranaction - appraisals, credit reports, title charges, etc...
A mortgage bank may charge processing fees and other fees to help with the revenue generated on a transaction.
I sum it it up with this - a mortgage broker shops the terms of your loan as a champion for you, a mortgage banker needs to sell you on the terms they have to offer through their individual company and the value for their service.
Do not assume that someone working at a company you do not recognize as a bank is a mortgage broker. You can confirm how a company is set up with a few questions such as "How many lenders do you shop?" or "does your company underwrite my approval?" or "are you independent?".
* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.