Consumers can get a mortgage from multiple sources. Maybe one of the most common places to secure a home loan is someone’s bank. Or, a consumer can get a mortgage from a mortgage banker that offers mortgages only, unlike a bank which can offer other financial services such as checking and savings accounts and credit cards. The third way is to work with a mortgage broker. A mortgage broker doesn’t provide direct financing but works with multiple lenders who use brokers to find new business.
Why do mortgage companies use mortgage brokers? A mortgage broker works multiple sources to secure new mortgage business. A mortgage banker however is limited in choices other than the loan programs being offered. A mortgage broker has marketing agreements with multiple mortgage companies providing more financing options than an individual mortgage banker can provide.
A mortgage company signs marketing agreements with a mortgage broker. The mortgage broker brings in new business the mortgage company wouldn’t ordinarily originate. One of the biggest expenses of any mortgage operation is marketing. There are a lot of players in the mortgage business and it costs a lot of money to get the attention of those wishing to finance a new home or refinance an existing mortgage. A mortgage broker saves the mortgage company a considerable amount of marketing costs. A mortgage broker solicits mortgage business from real estate agents, builders and other private sector organizations.
But if a mortgage broker provides mortgage companies with new applications, doesn’t that make a mortgage broker more expensive than a direct lender? No, not at all. In fact, because a mortgage broker brings in new business, the mortgage broker actually receives rates that are considered “wholesale.”
Wholesale loans are those offered at a discount to a mortgage broker. The broker then marks up the wholesale rate to a retail level. Mortgage companies compete with one another for this type of business and in doing so can offer more competitive pricing than other companies. The mortgage broker essentially looks for a more competitive loan program from its list of wholesale lenders. In addition, a mortgage company can offer a loan program that other mortgage companies do not provide.
These programs, sometimes referred to as “portfolio” loans, serve an important niche in the industry. For example, conventional loans ask for a self-employed borrower to have at least two years of self-employment before being eligible for financing. A portfolio program can provide financing for someone that has been self-employed for just one year. There are many other examples but the point is the broker has access to a wider range of programs compared to an individual lender. Mortgage companies actually hire individual sales representatives whose sole job is to solicit and nurture mortgage business from mortgage brokers.
Using a cost-saving mortgage broker is an efficient way for a mortgage company to originate more loans at a lower cost. Mortgage brokers also bring quality loan applications to a mortgage company and can earn the reputation of originating quality loans. And, a mortgage broker might advertise a particular niche product that other mortgage companies may not have. Again, the mortgage broker marks up the rate to a retail level but the mortgage broker can also determine what that markup might be and is not dictated ahead of time what the retail rate would be. The mortgage broker might leave the rate alone and instead charge an origination fee or some combination of both.
This arrangement between a mortgage broker and a mortgage company concentrate on a specific area of home lending. A mortgage company will use its resources to process and approve a mortgage application while a mortgage broker concentrates on finding new business and taking over the marketing aspect of loan origination.