There are different ways to get a new mortgage. A bank will offer a mortgage, so too will mortgage bankers. Each has its very own department that decides which loans to offer and what rates and fees to charge. A bank offers various financial services such as checking and savings accounts while a mortgage banker only offers mortgages. Both set their underwriting guidelines their clients must adhere to. Both can even add their own approval guidelines to existing programs, often making it more difficult to qualify for a particular loan. But the third place to get a mortgage is with a mortgage broker.
What exactly is a mortgage broker? A mortgage broker has a fiduciary responsibility with the borrower to match the ideal loan program at competitive rates and terms. But the mortgage broker, as with other types of brokers, does not underwrite the loan. The mortgage broker doesn’t use its own line of credit to fund approved mortgages. A mortgage broker has multiple marketing agreements with “wholesale” lenders.
That’s a key term to know. Some in the past may have the mistaken impression that mortgage brokers are more expensive than a bank because they act as middlemen and charge a fee to the consumer. But that’s simply not true. In fact, it’s just the opposite. Wholesale lenders solicit loans from mortgage brokers and offer rates that are below retail, or street level pricing. Wholesale lenders hire customer service representatives whose job it is to locate quality mortgage brokers in an attempt to get more loans from the broker. One way to get a broker’s business is competitive pricing.
A mortgage broker can have five or six active wholesale lenders at any one time. Each day, the wholesale lender issues its wholesale rates to their approved mortgage brokers. While rates and fees from multiple lenders will always be very similar, there are always slight differences.
One wholesale lender might be 0.125% lower than everyone else one day. The mortgage broker could then select that lender for a specific transaction providing the borrowers with a slightly better rate. Once the rate is marked up to retail, the broker gets its compensation. This compensation can come from the wholesale lender or it can come from the borrower directly but in either case the borrowers pay less, not more when using a mortgage broker.
In addition to competitive pricing, brokers also have access to multiple loan programs. A wholesale lender might have a special loan program for first time buyers or accepts slightly lower credit scores than another. This means a borrower can submit an application to a mortgage broker and have access to loan programs offered by multiple lenders, not just one.
Experienced mortgage brokers have access to not just government-backed loan programs such as VA, FHA and USDA loans but also conventional loans with guidelines issued by Fannie Mae and Freddie Mac. Further, mortgage brokers also have working relationships with so-called “portfolio” lenders. A portfolio lender introduces its own mortgage programs that typically cater to a specific client base. The portfolio lender doesn’t intend to sell the loan but keeps it in its “portfolio.” This is another reason why a mortgage broker can find a loan approval for someone that is having trouble getting approved for a mortgage.
We mentioned the fiduciary responsibility mortgage brokers assume when taking on a new client. The loyalty is to the borrower whereas the mortgage lender or the bank does not have such a legal mantle. A mortgage broker works on behalf of the borrowers and can negotiate terms of the loans as well as come to the rescue when an underwriting guideline is being misinterpreted by an underwriter or there is some confusion regarding a specific approval requirement. An individual borrower would not know how to respond when a loan application is turned down or being questioned, but an experienced mortgage broker would. A mortgage broker is your best friend in the mortgage industry.