With the myriad of mortgage alternatives available, it simplifies matters to think in terms of two options.
You can either use the services of a mortgage broker. Or, you can bypass the broker and go directly to a lender.
Banks, mortgage bankers and lenders make loans to consumers. They have the money to lend. If you go to one of these institutions to get a mortgage, you will be dealing directly with the money source.
In this case, a loan agent, who is employed by the lender, takes your mortgage application and helps process your loan. The lender's underwriters evaluate your financial documents to determine your credit-worthiness. Lenders either have their own appraisers, or they hire outside appraisers. But, your mortgage is processed in-house. The lender usually collects fees at closing to cover the cost of originating and processing your mortgage.
A mortgage broker, on the other hand, usually does not have money to lend. A broker acts as an intermediary between the borrower and the lender. You submit a loan application and all of your supporting financial documentation to your broker, rather than directly to a lender. The broker hires a lender-approved appraiser to appraise the property for you.
Brokers shop the mortgage market for their customers to find the best interest rate and terms possible. When the borrower decides on a mortgage product, the broker assembles the loan package, which consists of the borrower's application, financial documents and the appraisal, and submits it to the lender for approval. The lender's underwriters grant final approval.
Mortgage brokers work on commission. They charge borrowers a fee (called points) for their loan brokering services. (One point is equal to one percent of the loan amount.) The broker's fees may be in addition to fees charged by the lender.
HOUSE HUNTING TIP: Why would you want to pay two loan origination fees when you can pay one if you go directly to the lender? One reason is that mortgage brokers can arrange financing that wouldn't otherwise be available to you.
Some lenders work only with mortgage brokers. They do not accept loan applications directly from individual borrowers. These lenders are called wholesale lenders. Some of these loans have the best rates and terms available.
A lender that deals directly with borrowers is called a retail lender. Some lenders have both retail and wholesale divisions, which often charge different fees. For example, if you go directly to Bank X for a mortgage, you'll be charged one point. If you use a mortgage broker who brokers your loan through the wholesale division of Bank X, the mortgage broker will charge you one-half point and Bank X will charge one-half point for a total of one point.
Make sure that you don't use a mortgage broker who charges excessive fees for his or her services. You shouldn't pay more for a mortgage through a broker than you would if you went directly to the same lender.
As in any profession, there are people who do an outstanding job. They value your repeat business and referrals. Unfortunately, there are a few less-than-scrupulous people who take unfair advantage of any situation. So you should ask for referrals from acquaintances you trust. And check rates and fees with competitors before choosing a broker.
THE CLOSING: A big benefit in using a broker is that he or she can quickly move you from one lender to another if for some reason you have difficulty qualifying. Also a broker may have access to a larger array of mortgage products than might be available from an individual lender.
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