Q: Can you kindly, and urgently, advise me regarding what the difference is between choosing a mortgage loan broker and going directly to the bank for a mortgage? How much should a fair broker charge for his services? Thanks.
A: Your last sentence sounds like you’re in the real estate industry and teeing up the ball for any number of loan broker jokes. But I’ll spare us all and move on to your question.
In short, the business model for the two are different, but the result for the customer is largely the same.
The banks use loan officers who are generally paid a small salary with the bulk of their money coming from commissions.
Mortgage brokers are typically independent contractors. That is, they essentially run their own business, just like a Realtor does. They are paid strictly on commission. And just like a Realtor, this is true even when the loan officer appears to work for a brokerage company.
An “in-house” bank loan officer has the possible advantage of having a very close relationship with the inner workings of the bank. He or she may have private numbers and emails that can occasionally help get logs unjammed.
On the other hand, a bank’s loan officer is usually pretty limited in the number of programs they can put their customer into.
While I’ve known of banks that allow their loan officers to broker loans for other companies if they are unable to use a bank program, I think this is rare.
Generally, if you go to a bank to get a loan you’re going to get a loan from that bank.
A mortgage broker can have a relationship with any number of banks.
That can afford the broker the ability to be more flexible. If you don’t qualify for a loan from Bank A, perhaps the broker can redirect your application to Bank B.
However, for this service, the loans can be a little more expensive, or at least appear so.
Loan brokers typically get paid through fees generated in the transaction. Loan origination fees are an example.
Those fees may not be as high if you walk into a bank.
However, remember that both types of loan officers make a commission. The money for that commission has to come from somewhere, i.e. you. But at the bank they can be absorbed through prepaid interest points or interest in general.
By the way; you’ll note that the whole “in-house verses broker” analysis is exactly the same as what we’re used to in the insurance world.
I’ve had mortgages and insurance through both types. I can’t tell you that I have a preference for one type of loan officer over another, any more than I do with insurance.
I think it’s far more important to be dealing with a loan officer who is knowledgeable and with whom you have a sense of trust. The corporate name on top of the business card is very secondary.
Regarding fees, I don’t know if there is a rule of thumb. However, the law requires all prospective borrowers to get a document that provides a good faith estimate of the annual percentage rate, or APR.
This calculation takes into account loan fees with the goal of showing the borrower how much, after the smoke clears; the borrower is really paying for the loan.
And APR statement can’t show you which loan is better for you. That’s far too personal and complicated, which is why you have to have some trust in your loan officer. But it does allow you to compare costs.
That’s why I’d suggest to you and anyone else that you talk to two or three loan officers to see what they have to offer you, including what it will cost.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column you can contact him at [email protected].