A good mortgage broker finds the best loan for a borrower by shopping several different investors. The essence of being a mortgage broker involves flexibility, both in terms of loan programs and loan pricing. The other key metric is loan execution. Let’s compare these variables.
Who wins the battle between mortgage brokers and the banks?
Loan Programs
Mortgage brokers can setup wholesale lending relationships with many different investors, from big banks to small credit unions. By doing business with a multitude of lending sources, the mortgage broker has many more loan options to provide to clients. Compare this to a client going directly to a mortgage bank. Each respective bank only has their loan products to offer, which may not be in alignment with what a client needs. For example, most banks only offer standard “A” paper product, meaning for many clients, they don’t have any useful product such as alternative income documentation loans.
Advantage: Mortgage Broker
Loan Pricing
Let’s compare a borrower going to a bank vs. a broker. The first item to note is that mortgage rates change daily (sometimes multiple times in one day), impacted by how mortgage securities and Treasury bonds are trading on the secondary market. That bank may have good pricing some of the time, but there is also a good chance they may not be the best-priced lender on any given day. A mortgage broker on the other hand can shop amongst many lending sources, including the wholesale divisions of these same banks that a borrower could go directly through a retail channel. A good mortgage broker can isolate the investor that has the best pricing for the borrower on the day the loan terms are locked in as they have many investor options to choose from.
It should be noted that with jumbo loans, retail divisions of the national banks will sometimes provide various price incentives (examples are for a certain deposit threshold, say over $1 million with that bank, or setting up autopay) that effectively undercut the pricing a mortgage broker can obtain. This pricing anomaly was present for years after the 2007 housing crisis, but jumbo pricing has come back strong with mortgage brokers recently, whereby mortgage brokers are now matching and beating these national banks.
Advantage: Tie
Loan Execution
This is the metric that should be the most important, but is often overlooked. Many borrowers assume obtaining a mortgage is like getting a credit card or insurance policy for a house and treat their home financing like a commodity. The reality is that although home financing has a come along way and will continue to improve in the digital age, there is still a loan process that is involved, which can be complicated for many borrowers’ situations. The borrowers who obtain the best service and terms understand that their real estate holdings are probably their greatest investments and treat it accordingly.
While some “vanilla” loans can fund without a hiccup by going directly through banks and the online consolidators, more often than not in the loan process, issues come up that are unique or require special handling. This is where the systems often breakdown at these banks as they have so many people touching the file without having a “go-to” person that can get things done in an efficient manner.
Compare this to a good mortgage broker, who usually has a deeper knowledge base and can much more efficiently push a deal through to funding. All it takes is a simple look at incentives to see why good mortgage brokers have historically greatly outperformed banks. Bank employees will get paid regardless of if your loan funds on-time or even at all. There isn’t really a lot of incentive to stay until late in the night to work on your deal. Compare this to a mortgage broker who does not get paid unless your deal funds. A good mortgage broker is greatly incentivized to not only fund your deal, but to do so in a way that makes their clients “Raving Fans” that will refer them business.
Advantage: Mortgage Broker