Q: What are the pros and cons of working with a mortgage broker vs. a mortgage lender? –Malik

A: There are several, although in some respects, the gap between mortgage brokers and mortgage bankers has narrowed in the wake of the foreclosure/housing market crisis.

Generally speaking, mortgage brokers are licensed, independent contractors associated with independent, licensed brokerage companies, who work on 100 percent commissions to connect mortgage consumers (those seeking to finance a home purchase, and those seeking to refinance their current homes) with loans from a variety of mortgage banks and lenders.

Mortgage bankers or lenders, on the other hand, are usually employees of a mortgage bank who work on some combination of salary and commissions to connect borrowers primarily with loans funded by their employer. Walk into a bank off the street and the person who handles your loan application is a mortgage banker.

After the bubble, more and more mortgage brokers have become their own banks, meaning that a small portion of the loans they originate are actually funded by their own companies. Similarly, more and more bankers are also brokering loans through external companies. But, still, their primary job is to connect consumers with the loan programs offered by their employer.

From the outset, it’s only fair to state that my bias is toward working with a mortgage broker. I have known great mortgage brokers and crooked mortgage brokers, and I have worked with both brokers and bankers.

But the customer service extended by an honest, experienced, effective and reputable mortgage broker blows that of even a great mortgage banker out of the water, nine times out of 10.

With that said, I’ve had even my own favorite mortgage broker send our mutual clients to a mortgage bank in situations where the bank or a homebuilder was offering truly significant incentives for working with that bank. (Now, that’s honesty.) So there are some occasions on which a mortgage banker is the way to go.

Alright, let’s get to pros and cons. First: options. Mortgage brokers generally have more options than mortgage bankers, meaning more lenders at their disposal from which to choose. During the subprime era, that often meant that some bankers couldn’t do deals that mortgage brokers — who had contacts with will-lend-to-anything-moving banks — could.

These days, it’s more an issue of shopping to get you the best interest rate. Reputable mortgage brokers will vie for your business by trying to find the very best interest rate and terms for which you qualify among all the lenders they work with, including their own company, if it also operates as a bank.

Again, some bankers also broker loans outside of their banks, but they tend to have fewer lender, loan program and rate options available than a broker does.

Now, let’s talk about speed and customer service. The fact is, brokers usually work on 100 percent commission, which means that they want to get your deal done. Bankers are on a partial commission/partial salary.

This is a critical distinction in a world where the traditional mortgage banks have made it very difficult for a loan to get approved, underwritten and funded; for all these things to happen, you need someone who:

  • Is skilled at the art of mortgage; has loads of workarounds up their sleeve; and has a history of overcoming obstacles that come up;
  • Is truly motivated to close every single transaction they work on;
  • Has the relationships with various lenders’ underwriters to get things done in a timely manner; and
  • Wants — even needs — referrals from you and your broker or agent to generate more business in their long-term business plan.

These characteristics much more often describe mortgage brokers, in my experience and opinion, than mortgage bankers or lenders.

In today’s market, you may need to remove contingencies in 10, 12 or 14 days to best other offers on a foreclosure or even an individual sale. You might get to the end of a long transaction buying a bank-owned property and find your transaction in jeopardy if your loan doesn’t fund within a matter of a couple of days (despite the bank/seller having dragged its feet for the six preceding weeks).

My experience is that mortgage bankers rarely have the gumption or the power to speed up the underwriting and funding processes in these sorts of situations, while some brokers can.

And bankers certainly aren’t able to close transactions as quickly — overall — as top-notch mortgage brokers can. Because this can be the difference between getting a particular home or not, I personally choose to work with mortgage brokers.

Many of the shadier brokers have self-selected out of the business, as loans are so much harder to do these days. You can eliminate much of the rest of the shady factor by working with a mortgage broker you find by referral; get one from friends or relatives who are very, very happy with their experiences, and ideally have worked with their broker over many years.

With that said, there are a couple of circumstances when I advise people to talk to a mortgage banker rather than a broker.

First, when you are buying a new home, many homebuilders have relationships with lenders that can save you thousands and thousands of dollars off closing costs, homeowners association dues or even upgrades to the property.

In these cases, it may make sense to work with the lender, though I do recommend also talking with a mortgage broker just to make sure you’re not taking a hit on the interest rate or otherwise getting a raw mortgage deal for what sounds like a good incentive.

Second, many who are refinancing find that their current mortgage lender may offer a no-fee refinance. Again, I’d encourage you to get a rate quote from a reputable mortgage broker, if you are trying for a no-fee refi with your current lender, to make sure the fees aren’t simply being recouped in the form of higher interest.

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