Mortgage broker vs. mortgage banker: Who offers the best mortgage rates?
When you’re shopping for a home loan, you have two main sources of money — the mortgage broker and the bank (also called a “direct lender” in the mortgage industry).
One might be better than the other for you, depending on your circumstances.
The key, though, is to get quotes from both sources and compare offers. You might be surprised at the difference.
How banks work
Does it matter whether you choose a mortgage broker or a bank? It might, depending on your needs.
Mortgage banks use their own money to fund mortgages, and their loan officers, processors, underwriters and funders all work for the same company. After the loan funds, it may be kept in the lender’s portfolio of investments, or it may be sold to investors.
Loan officers serve as the bank’s sales force. They usually earn commissions for originating loans, and the prices they charge may not be negotiable. They can only sell products offered by their employer, and that can limit the options offered to you.
Loan officers can offer the same loan at various price points, from “no-cost” loans with higher rates to more expensive but lower discounted rates.
How brokers work
Brokers act as the sales force for wholesale lenders. Wholesale lenders send their brokers rate sheets, which list the rates and prices available for each product. Brokers are often smaller than banks.
A loan with a higher rate may have “rebate” pricing, money which can be used to pay the broker’s commission and perhaps other closing costs on the borrower’s behalf. This rebate is also called a Yield Spread Premium, or YSP.
For loans with lower rates, the borrower pays the broker’s commission, usually about one percent of the loan amount.
Brokers work with a variety of wholesale lenders, which gives them access to many products at many price points.
Pros of mortgage banks
Here are the pluses of dealing with a mortgage bank.
* They work on your loan from start to finish. Your loan officer deals in-house with fellow employees and may have more control and communication during the process.
* If working with a brick-and-mortar institution and a banker you already know is important to you, your local bank may offer the best experience.
Cons of mortgage banks
And here are the drawbacks.
* Unlike brokers, banks don’t have to disclose what they make on your loan. You may pay more than you need to [if you don’t shop aggressively.](https://www.consumerfinance.gov/about-us/blog/nearly-half-of-mortgage-borrowers-dont-shop-around-when-they-buy-a-home/)
* Mortgage banks tend to offer fewer products. If they don’t sell the loan that’s best for you, they may not tell you about it (or even know about it).
* A conservative bank may not approve you, even if you’re a good candidate for financing.
Pros of mortgage brokers
Brokers operate differently. Here are the upsides.
* Brokers have access to the offerings of many wholesalers. They may provide a better and more specialized product to those who need it.
* Brokers can set their own profit margins and may be easier to negotiate with.
* The broker’s compensation is clearly disclosed on your closing statement.
Cons of brokers
Brokers also have their drawbacks.
* Brokers have less control over the process because they don’t work for the lender. If the wholesale underwriter puts your file on the back-burner, your broker may not be able to do anything about it.
* Brokers, as a rule, tend to be more expensive but that may be because they get more complex loans, and HUD says that complexity does drive up lender costs.
* Brokered loans can take longer to close — a concern if you have a tight deadline.
Who should use a mortgage broker?
In general, if your loan is a straight forward transaction, and your credit, income and assets are strong, you may be able to save time and money with a bank.
If your application involves challenges, a broker who knows which lenders are most flexible can help. For instance, a broker might be best if your FICO is 600 (higher than the minimum for FHA loans), because many lenders impose higher minimums, making it harder to get approved.
A good broker would know which lenders don’t apply tougher standards and are more likely to approve your application.
That said, many brokers today offer competitive pricing in line with that of direct lenders. And many banks today have a larger variety of programs. Look for portfolio lenders if you need something really creative.
To get the best of both worlds, obtain loan quotes from at least one broker and at least one bank when you shop for a mortgage.