Getting Started: Choosing Between Mortgage Broker and Bank

Disparaged by some as the bogeymen of the housing crash, mortgage brokers have taken a beating over the last few years.

With many having been dropped by the big banks in favor of in-house sales channels, and with their industry much more tightly regulated, brokers have seen their ranks so drastically thinned that, instead of controlling the origination market as they did a decade ago, they account for a slim 9.7 percent, according to Inside Mortgage Finance, an industry publication.

Yet mortgage brokers are still a worthwhile option for borrowers, who now have some protection from the shady practices of the past. New federal regulations forbid brokers to pocket premiums from lenders in return for steering customers into higher-priced, high-risk loans. And under the SAFE Mortgage Licensing Act of 2008, brokers have to pass state licensing exams in order to prove they know the rules of the financing game.

“The nice thing that the SAFE act has done is we’ve weeded out a lot of those bad people that everyone likes to talk about,” said Donald Frommeyer, the senior vice president of Amtrust Mortgage Funding in Carmel, Ind., and the president of the National Association of Mortgage Brokers.

Why a Broker?

A mortgage broker is basically a middleman. Brokers work with a variety of lenders to find loans for clients, but do not lend out money directly. That’s the role of a mortgage lender, the entity that supplies the funds going to the closing table. The lender could be a mortgage bank, which specializes in mortgages; it could be a large commercial bank, a community bank or a credit union. The largest mortgage lenders, by share of originations, according to the publication Mortgage Daily, are Wells Fargo, JPMorgan Chase and Bank of America. Ask a broker what he or she can offer that a bank can’t and the response will almost certainly be variety. Because brokers are not tied to any one lender, they have the ability to shop around on behalf of their clients. As Mr. Frommeyer explained, “I have 20 companies I can go to — everybody has a different program.”

In reality, these days, the variation in lenders’ products and rates is much more limited than in the era of easy credit. “When it comes to a 30-year fixed, the rate of pricing is pretty darn tight,” said Bob Walters, the chief economist for Quicken Loans, a major online mortgage lender. “We’re not talking about huge differences.”

But a borrower might still save time and irritation by having an experienced broker shop around for the best mortgage deal. Borrowers who might not be shoo-ins for a loan, perhaps because of lagging credit or other circumstances, might find that a broker with lots of lending contacts will have a good sense of what the financing possibilities are, if any.

Another plus for busy borrowers: Brokers handle the paperwork and interactions with lenders. And they may be able to head off problems. “The broker understands the guidelines of the lender, and has the chance to look at your information before it is sent to the lender,” said Tim Malburg, the president of the Capstone Mortgage Company, a brokerage in Wilton, Conn. “Anything that raises a red flag, I’m going to ask you about.”

None of this is to suggest that borrowers should blindly trust a single broker to work on their behalf. After all, brokers get paid by closing loans. The borrower might check with two or three.

Why a Bank?

If brokers offer clients variety, mortgage lenders have the advantage of control. Because the bank is the one lending the money, the bank makes the decisions. That can make a big difference in situations “when you need a small exception, or a subjective decision is needed,” said Mr. Walters of Quicken Loans. “A banker can say, ‘I’m going to fund this loan,’ while a broker might get jammed up.” Mistakes might also be resolved more quickly.

Borrowers who have a long-term relationship with a bank for other services might be offered favorable terms on a home loan. And they might find that some mortgage products, like “jumbo loans,” are available only through a bank. (A jumbo loan exceeds the conforming-loan limits set by Fannie Mae and Freddie Mac, which in New York City and other high-cost areas is $625,500.)

Because the secondary market for mortgages has shrunk so markedly, “what’s happened is more of the mortgage products available are available only through banks that have the capacity to hold those loans on their balance sheet,” said Malcolm Hollensteiner, the director of retail lending sales at TD Bank.

For example, he said, although TD Bank can offer borrowers jumbo loans, brokers have far less access to jumbo products than they did before the housing crash.

Better to Compare

The bottom line is that borrowers should compare offerings from both brokers and banks (whether online or at a bricks-and-mortar location). Mr. Malburg of Capstone recommends contacting three or four mortgage sources, and keeping track of their interest rates, lock-in fees and points on a spreadsheet. (Try to stick with a specific kind of loan, like a 30-year fixed, to simplify your comparison.) Then, he said, narrow it down, and call back to get details about closing costs, including lender origination fees, and whether there is a prepayment penalty.

Keep in mind that interest rates change constantly, so you may find that rates are different when you call back. “You’re chasing a moving target,” Mr. Walters said.

When comparing loan costs, be sure to ask how the broker is being compensated. The broker fee is set as a percentage of the loan amount (1 to 2.5 percent is customary), and is paid either by the borrower or the lender. Brokers are required to disclose their fees upfront, and they are not permitted to earn any more than the disclosed amount. On a $500,000 loan, a 1.5 percent broker fee would total $7,500. If due from the borrower, it could either be rolled into the loan amount or paid upfront by check.

Mr. Walters urges borrowers to look beyond cost considerations and also pay attention to how the broker or loan officer responds to their request for information. “People say, ‘How do I know if I’m talking to a good mortgage banker?’ and I tell them, ‘It’s the person who asks you the most questions,’ ” he said. “Someone who is just quoting you rates, well, you might as well be buying gasoline.”

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