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Banks vs. Mortgage Companies
Many people describe the mortgage lending process as a tangled
maze, difficult to navigate. Years ago this may have been true,
however with the advent of Web lending services the process of
securing a loan is becoming more and more simple. The following
article is an introduction to the institutions that lend money
to consumers for real estate, the process of securing a loan, along
with some basic information on how lenders decide whether or not
to lend to a borrower and his/her property.
Brokers versus Bankers - Product Selection
Some mortgage sources are direct lenders such as banks and mortgage
bankers with retail establishments. Usually banks or mortgage banks
will be competitive in one or several products, and will encourage
their sales agents to sell these products to the consumer. Many
times banks will not even necessarily try to be competitive in
rate, but will instead try to fill a niche, such as quick approvals
or flexible underwriting (easier approval) of loans. Going directly
to the bank or source was probably the way that your parents obtained
their home loan, but the trend is clearly away from such direct
establishments towards the brokerage or ``multi-lender platform''
as brokers are now being called on the Web.
Brokers or multi-lender platforms represent a number of lenders
and offer these lender's products through a wholesale arrangement. So
the broker can offer wholesale rates, as opposed to retail rates.
The lender will then compensate the broker when they deliver a
loan to them and this compensation is invisible to the borrower.
Many banks that offer retail or wholesale loans will allow the
broker to charge up to 1% of the loan amount for their compensation.
By offering wholesale rates, a broker can in fact be more competitive
than the retail side of the same bank. This is happening more and
more as brokers are moving their services to the Internet and reducing
their costs of distributing loans to the consumer.
Multi-lender brokers on the Internet can be the most competitive
source for mortgage loans available. However, be wary of multi-lender
sites that limit their choice of lenders to less than 10 sources.
Many such sites are charging the bank to participate and can not
offer unbiased selection as they are captive to their lending sources.
Brokers versus Bankers - Service
Direct lenders are captive to their own products. That is, they
will not provide unbiased advice nor selection, since by doing
so they will possibly risk losing your loan to the company whose
product truly provides you the most value.
Brokers on the other hand can sell a variety of products, from
multiple sources, and can be objective in their recommendations.
The compensation provided from one lender is equal to that from
another lender, therefore the outcome of the recommendation doesn't
matter. What does matter is giving you the best loan for your needs.
If you walk into your local bank, S&L, or retail mortgage
bank they'll usually take your application there, perhaps underwrite
your loan there, and lend their own money. If your loan is declined
for whatever reason, you will need to begin the process again with
another source. With a multi lender source, you have another chance
if one lender doesn't approve your loan.
Bankers make their salary whether you take the loan or not. Brokers
only get paid when the loan closes. Who has the most motivation
to get you a loan?
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