Mortgages are available from many different sources:
large national banks
specialty lenders
online lenders
mortgage brokers
Each of these options has its advantages and disadvantages.
Most mortgages used to be done by financial institutions. Because of down-sizing, many financial institutions are now happy to get their loans from mortgage brokers. This lets them cut down their full-time staffs. Mortgage brokers bring them loans that are fully prepared (application, supporting documentation), and the financial institution only does the loan if it makes sense. This keeps their overhead down, because they don’t have to pay an in house staff to do all the work a mortgage broker does for them. In a sense, the financial institutions have “outsourced” a huge portion of the mortgage industry to brokers.
Most financial institutions, although not all of them, work with mortgage brokers. This is their “wholesale” channel, and their offices where customers can come in and talk to them directly are their “retail” channels. They offer mortgage brokers “wholesale” rates that are generally lower than retail rates. The markup to retail rates can be part of the mortgage broker’s profit. In this way, mortgage brokers are able to offer comparable deals to the retail branches of financial institutions. From the lender’s perspective it doesn’t necessarily matter if the loan comes from an outside broker or a retail branch. Either way they still get it and make money on it.
Large Lenders
A large national mortgage lender will typically have a wide number of loans. Some of these types of loans are only available through their retail branches, and not through mortgage brokers. Most of the loan programs are the same between financial institutions and mortgage brokers.
Although they are names you are familiar with, and they are big companies, you don’t necessarily get a better deal from them. Some of them use their reputation, and the convenience of applying through a bank branch, to charge higher rates.
This author’s first mortgage application was with my retail bank. This major company wanted to charge me 2% more than the next competitor on my first home loan (before I was even in the business). Needless to say, they didn’t get the deal.
Specialty Lenders
Specialty lenders work on specific niches:
great credit
bad credit
specific regions
investor loans
They tend to do specialized types of loans that general lenders won’t do, or do as well. They may accept borrower loans with
higher debt loads
worse credit
higher loan to value ratio on the property
less seasoning of the property
people with limited credit, such as only recently opening credit lines
Some of them focus on “A Paper” or great credit loans. Their rates can be better than others in this niche. Most of the niche players, however, focus on the lower end of the credit spectrum.
Online Lenders
Some lenders only offer their deals online. In theory this is supposed to simplify the mortgage process and pass on the savings to the customer.
Their rates are not necessarily lower. Again, they can trade on the fact that some of their customers won’t shop around because they think they got a deal on the internet.
Mortgage Brokers
Mortgage brokers work all different types of loans. Some specialize in specific areas, such as borrowers with lower credit or borrowers looking to buy rental properties.
They get their loans from other sources, such as big banks or specialty lenders. They take your application and loan documentation and in theory shop it around to multiple lenders for the best deal.
Comparing Mortgage Sources
The critical difference between the loan offers you receive is about fees you are offered. These vary not just by company but also by the people within them. You can talk to someone in a bank who is a real “high fee” kind of guy looking to maximize his profits on your loan, or you can work with a smaller guy who wants your repeat business over time so he charges you less.
You can get a terrible, fee gouging loan from the big bank you have used for years, and you can get a low fee loan from a specialty lender. It depends on your ability to shop and negotiate.
Lenders and mortgage brokers that specialize in lower credit borrowers often charge a higher amount of different fees.
Some loan sources may offer written guarantees which can be useful. These can include a written interest rate guarantee (a “rate lock”), or a promise to close your loan within 30 days or you get some kind of refund.
You can ask around with friends and family to see if someone works with a particularly good loan person. If you talk with them, let them know who you were referred by. If this loan officer wants to continue to do loans with people in your social network, they may be more inclined to offer lower fees overall so they can continue to get more business. They are less likely to jeopardize any future ongoing business with your social network by gouging you.
For more information visit www.archerpacific.com
Loan Library
The author is the owner of Archer Pacific, a mortgage company. The firm's website, http://www.archerpacific.com, has extensive resources and tips on many mortgage topics.
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