Most people do not have the cash on hand necessary to buy a house and end up applying for a mortgage to make the purchase. When applying for a mortgage, a buyer has a couple different options on who and where to go. One of those options is a mortgage broker. The process of using a mortgage broker is almost identical to the process if a person uses a regular loan officer, but there are a couple of things one should be aware of.
What is a mortgage broker?
A mortgage broker is an individual or company who acts as an intermediary between a borrower and a wholesale lender. The broker is approved to do business with and submit loan applications to various wholesale lenders who make residential mortgage loans. A mortgage broker does not lend their own money, but rather lends money provided by a third-party lender. The general public does not have access to wholesale lenders who offer the lowest interest rates, typically lower than what a local bank will offer. Essentially, a mortgage broker is a loan officer who does not work for any specific lender, but rather interacts with many lenders and facilitates the loan process the same as a loan officer would. A mortgage broker is paid by including fees in the loan that are payable to them. Typically, the closing costs associated with using a mortgage broker will be a bit higher than those associated with using a traditional loan officer. A loan officer is an employee of a bank that makes residential mortgage loans with its own money and services the loan in house. They typically work with only one lender, their employer. However, some banks will operate as mortgage bankers. A mortgage banker will make loans with its own money or will make loans with outside wholesale lenders as a mortgage broker would.
The loan process is the same when a person uses a mortgage broker, but the broker will typically submit the borrower’s application to a couple different lenders, looking for the best rate and approval terms, and this can in many cases generate multiple inquiries on a person’s credit reports. This can cause the credit score to drop a bit more than it would have if they were using a traditional bank loan officer who would only pull the credit one time. Also, since mortgage brokers do not service the loans themselves, the loan will be serviced by a third-party servicing company and can and usually will be sold at least once. What this means for the borrower, is that the company that they deal with to make payments to, to set up automatic payments and who handles their escrow account will change at least once during the life of the loan and will not have a local office where they can deal with people in person.
The main advantage to using a mortgage broker or banker is that they have the access and ability to the lowest interest rates and to the most loan programs available. An in-house bank interest rate will always be higher than the rate a mortgage broker can obtain, and a mortgage broker has the ability to find higher loan to value programs for refinances and lower down payment requirements for purchase loans. The access to the lower interest rates can far outweigh any negative aspect of using a mortgage broker, because it makes the monthly payment lower and ultimately results in the borrower paying back much less in total interest charges. One final thing to consider when deciding what type of lender to use is the current competitive lending industry. Over time, the traditional roles of mortgage broker and loan officer have shifted and somewhat combined. This is a result of banks taking a more retail approach to business and attempting to become more competitive when lending on home loans. Specifically, this means that many loan officers at banks now have the ability to operate as a mortgage broker or as a mortgage lender, meaning that they can make the loan in-house with the bank’s money and service the loan from the bank, or make the loan through a third-party wholesale lender, and have the loan serviced elsewhere. So, while overall, it is better to use a mortgage broker, most bank loan officers can operate as brokers and provide all of the corresponding advantages to the borrower.