When you’re ready to get a mortgage, you face a dizzying array of choices: Fixed rate or variable? Points or no points? Mortgage broker or mortgage lender?
That last decision – mortgage broker or mortgage lender – involves a simple but easily misunderstood distinction.
Simply put, a mortgage broker is an independent professional who can shop around to find deals from a variety of lenders. A mortgage lender is represented by a loan officer who can speak only for that institution’s product line.
What does that mean for the borrower? As a practical matter, a mortgage broker can present you loan packages from multiple lenders – for instance, Wells Fargo, Chase and Quicken Loans. The loan officer from Wells Fargo, on the other hand, can pitch only Wells Fargo mortgages.
The advantages of dealing with a lender include reliability and reputation. With a broker, you have greater flexibility. Based on your financial profile, the broker may also line you up with a lender where you’re most likely to qualify for the loan.
When in doubt, comparison shop
So, which one should you use? There’s no clear answer, says Eric Tyson, author of Personal Finance for Dummies and co-author of Mortgages for Dummies.
“I’ve seen people be happy using either option,” Tyson says. “The important thing is to shop around.”
Tyson suggests soliciting loan packages from a mortgage broker and a couple of mortgage lenders, then judging which proposal offers the best deal based on rates and fees.
In the end, whether to use a mortgage broker or mortgage lender depends in part on your finances. If you have stellar credit and steady income and you’re shopping for a plain-vanilla loan, mortgage rates and loan fees are unlikely to vary much from one lender to the next.
If, on the other hand, you have spotty credit, you’re self-employed or you have an otherwise-tricky profile as a borrower, you may find the number of mortgage lenders willing to do business with you is more limited. In that case, it can be more convenient to use a mortgage broker. After all, they make a living from their knowledge of various loan products.
Laws offer protection
Unfortunately, the image of both mortgage brokers and mortgage lenders was tarred by a minority of unethical practitioners who built an unsavory reputation for themselves during the housing bubble. The movie The Big Short, based on author Michael Lewis’s expose on the U.S. mortgage meltdown of 2005, portrayed greedy mortgage brokers going so far as to target exotic dancers with bad loans. In another example, The Miami Herald reported in 2008 that thousands of convicted criminals were given mortgage broker licenses by the state of Florida. Not to be outdone, many mortgage lenders offered a menu of high-fee, high-risk loans.
Those excesses have largely gone away, however. The Consumer Financial Protection Bureau, created in 2010 to ride herd on the mortgage industry, released guidelines in 2014 that included a ban on “steering” – that is, on financial incentives for loan officers to push you into a loan you can’t afford. Lenders have stopped offering some of the risky loans that drove the housing bubble, and mortgage lenders and brokers operate under heightened levels of scrutiny and disclosure.
Tipping the negotiation in your favor
Whether you opt for a mortgage broker or a mortgage lender, the paperwork burden will be similar. Both will run a credit check, and both will ask for tax returns, pay stubs, bank balances and other information required for the lender’s underwriting process.
But payments for brokers and lenders are different, and understanding how the broker or loan officer is paid may help you land a better deal. Mortgage brokers are typically paid a commission by the lender – usually 1 percent to 2 percent of the amount of the loan. For loan officers at banks, compensation models vary. They might be paid a commission, but they typically collect a salary plus bonus.
To win your business, a mortgage broker might be willing to negotiate his fee, Tyson says. And the larger your loan, the more negotiating power you have.