Should I go to a bank or use the services of a mortgage broker?
Obtaining a home mortgage is often the largest financial commitment that a person will make in their lifetime. Who you choose as your lender is the most important decision you will make in this process.
Should you go to your bank or should you use the services of a mortgage broker? How are they different?
Federally chartered banks
Most people, when looking for a home loan, go first to their bank. They often have a checking or saving account there and feel that their bank will be more sympathetic if there is problem in the future.
This was true in the past with the old Savings and Loan institutions, such as portrayed in the Christmas classic “It’s a Wonderful Life”. Today, however, most banks sell their mortgages to investors, often Fannie Mae and Freddie Mac, and only “service” the loan.
Servicing the loan means they will continue to collect your payments and forward them to the investor who now owns the loan. For this, the investor pays the bank a servicing fee. Because the bank no longer “owns” the loan, they cannot change any terms of the loan without investor approval, which rarely happens.
Banks or even credit unions don’t have to offer to their clients all of the products that an investor (Fannie Mae, FHA, VA, USDA) may offer. They often choose to offer only the most popular (and most profitable) loan products and ignore specialty loan products that apply to unique circumstances (which could be you)
What’s worse, they often put overlays (additional restrictions) on top of their investor guidelines, which can tighten credit or appraisal requirements. This often means requiring a higher credit score or a larger down payment.
Why do they do this?
Because if a loan defaults, they may have to “buy” the loan back and lose money. Many banks that suffered huge losses on risky loans made in the past, have now taken the position that they only want the “best of the best” loans that have the lowest chance of default.
So if you have excellent credit, a large down payment and your bank offers exactly the loan you want, are you better off going with them? -Maybe not.
Interest rates offered by banks are often higher than rates offered by brokers
The retail operations of many banks (checking account fees, interest spreads from savings accounts, etc.) are not producing as much income as in past years. To offset this, they need to make up this lost revenue by making more money on the home mortgages they originate and then sell to their investors. They accomplish this by raising their rates above the “par” rates offered by their investors and selling their loans for more profit.
Unlike mortgage brokers, banks do not have to disclose to you how much money they make when they sell your loan to their investor.
So if you decide to use your bank, you could end up with a higher interest rate than a broker may charge. We recommend you shop around as bank rates and fees can vary greatly.
What about a mortgage broker? Aren’t they just a middleman you have to pay a fee to? – Not at all.
Mortgage Brokers have wholesale agreements with many large investors and banks and can “shop” these wholesale lenders to find the best loan program tailored for your specific circumstances and at the best interest rate.
These wholesale rates are lower than what these same banks offer to their retail customers. While this may sound crazy, it is just good business for them.
Why do large banks provide lower rates to brokers than what they offer to their own retail customers?
For a bank to be successful in the wholesale channel, it must compete with other wholesale lenders to obtain the loans originated by mortgage brokers.
Banks and investors may choose to offer their approved brokers lower rates, no overlays, faster approvals or niche programs that other lenders may not offer, in order to win their business. They do this because they have to, if they want to be competitive in the wholesale channel.
Banks realize that, even though they offer a lower interest rate to brokers, they still make more money from each loan they get from brokers than from their own retail operations.
Lenders in the wholesale channel don’t have to pay certain costs associated with loans originated through their own retail lending operations. That is, they don’t have to pay the salaries of their retail loan officers and the many layers of supervisors and vice presidents to oversee them, plus their expenses, insurance, 401k, pensions and for the offices to house them in, in addition to all the marketing and advertising fees to attract borrowers.
To save all this money, all they have to give up is the origination fee to the broker. They get to keep the underwriting fees and the profit they receive when they sell the loan. Simply put, broker operating costs are less per loan than their own retail operations.
In the wholesale channel, brokers can shop for the beat deal for their clients. That means sending their loans to the wholesale lender offering the lowest rate for the loan program best suited for their client’s needs.
Are there other advantages to using a broker other than lower rates or fees?
More loan products with fewer or no “overlays”
Mortgage Brokers often enter into agreements with many different wholesale lenders in order to offer their clients more niche products and reduced or no overlays on investor guidelines. Brokers are always on a search to find whole lenders offering newer loan products or lower rates. No single bank can offer the full range of loan products a broker can offer.
What we consider to be the most important advantage we offer to our clients, is our ability to send your loan file to another lender if any problems arise. The most common problem today is a low appraised value for the property.
As a result of the reforms made after the mortgage crisis, lenders can no longer choose which appraiser they wish to use for a particular property. They must use the services of an Appraisal Management Company (AMC). The AMC selects the appraiser from their list of approved appraisers.
While an experienced and knowledgeable appraiser may be assigned to your loan, you are just as likely to have someone much less capable determine the property appraisal value. When this happens, the result is often a lower appraised value than what the market should support.
With any bank or wholesale lender, once the appraisal is completed, it must be used. If there is a blatant mistake made, an appraisal review may be requested from the AMC and it will be corrected. However, in reality, the appraised value is almost never adjusted.
You may still be able to get approved for the loan by increasing the size of the down payment or accepting a higher PMI rate, if applicable. We have found, in most cases, a low appraised value just kills the deal with that lender.
At First Nations we carefully research any appraisal that does not come in at the expected value. If we feel that the appraised value does not accurately reflect the true value of the property we will request an appraisal review. If this does not work, we will offer to send your loan to another lender we do business with, who will order another appraisal from a different AMC.
Because we still have your complete loan package with all supporting documentation, this process is almost seamless.
There is, of course, a fee for the second appraisal, but if the new appraisal results in your loan being approved, it is worth it. If the appraised value is still too low, First Nations will pay the cost of the second appraisal.
Banks are not able to offer a second appraisal option, not to mention, paying for the second appraisal if it still does not appraise. You must begin the entire loan application process over again using a different lender.
But can you trust your broker?
Just as in any business, there are some brokers, as well as loan officers at banks, that are either unethical or poorly trained.
But consider this, as a result of new regulations enacted after the mortgage crisis, all mortgage brokers, as well as their loan officer employees, are required to take the Nationwide Mortgage Licensing System (NMLS) certification course. This certification requires completing 20 hours of NMLS approved education and receiving a passing score on the NMLS 4 hour exam. In addition, brokers must complete an annual 8 hour recertification course. Bank loan officers do not have to take these courses.
As a result, Brokers today are often better trained and certainly, more stringently tested than the loan officers at banks.
Who best represents your interest?
In South Carolina, by law, a licensed mortgage broker has a fiduciary responsibility to represent the borrower, not the lender.
This is written into the Broker Origination Fee Agreement that a broker has to have you sign. This form is mandated for use by the State of South Carolina. You won’t find this protection in any origination agreement offered by any federally chartered bank.
How do you find the right Mortgage Broker for your needs?
You should look for an accredited mortgage broker – one with all those initials after their name, such as CMC (Certified Mortgage Consultant) or CMPS (Certified Mortgage Planning Specialist). They don’t come easy. This will ensure that you are dealing with a broker who has elevated his game by investing in additional education programs to better serve you and who has agreed to conduct business in a highly ethical manner.
Call First Nations Home Mortgage today and we can discuss the advantages of working with a certified mortgage broker.