While house hunting can sometimes be fun, home loan shopping is rarely a pleasurable activity, particularly in these days of tightened credit standards. However, if you ask a homebuyer who has successfully snagged a mortgage loan with a low interest rate and low fees, they will express a moment of triumph that makes loan shopping seem like it could be less of a chore. (For more, check out 4 Steps To Attaining A Mortgage.)
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The first step toward qualifying for a home loan is to choose whether you will work with a mortgage broker or a mortgage lender. While borrowers can obtain a good loan from either a broker or a banker, there is a difference between these choices. A mortgage broker is an independent contractor who will search for a loan for you from a variety of lenders including large and small banks. A mortgage banker will only be able to provide you one of the various loan programs offered by his or her financial institution.
More than half of Americans choose to work with a mortgage broker, often because they feel a broker can do the legwork required to compare loan options. But mortgage bankers can also offer more than one choice for a loan, so just because a consumer goes to a mortgage banker does not mean they won't have a variety of loan programs available.
The main difference between mortgage brokers and mortgage bankers is that mortgage brokers do not fund loans themselves. They simply act as a link between a customer and a financial institution.
All mortgage bankers and mortgage brokers are paid by customers through fees paid at the loan closing, so the important thing for consumers to pay attention to is how much the loan costs. Comparing the mortgage interest rate is only the beginning. Borrowers also need to check whether they are paying discount points on the loan and then compare the total of the fees that will be charged at the closing. (Learn more in Mortgage Points - What's The Point?)
Advantages of a Mortgage Broker
The biggest advantage of working with a mortgage broker is that you can save time and effort. A good broker will research loans from a variety of financial institutions and recommend one or two loans that are a good fit for your needs. The broker will function as a middleman between you and the lender, funneling the appropriate paperwork to the lender. Rather than spending days comparing loan rates and fees from one lender to the next, you can turn over that job to a professional. Chances are also high that a broker will have access to a greater variety of loan programs than a banker.
Disadvantages of a Mortgage Broker
Since mortgage brokers function as a conduit between the borrower and the lender, brokers do not make any actual decisions about a loan approval or the terms of the loan. Those decisions are up to the lender. The borrower will not have direct contact with the lender and needs to rely on the responsibility of the broker to negotiate the best loan terms. Not all loan programs are available to all mortgage brokers, so there is a chance the borrower could miss out on a loan product that could meet their needs.
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Poor Credit and Mortgage Brokers
Borrowers with bad credit or a high debt-to-income ratio will have a difficult time obtaining a mortgage approval in today's tightened credit environment. Some borrowers may find that working with a small community bank or a credit union will give them more options for a loan approval since they can work with an individual banker and explain any extenuating circumstances that created their financial difficulties. Other borrowers may find that a mortgage broker with access to a larger number of financial institutions will be able to find one with looser credit guidelines that will make loan approval easier.
Mortgage Broker Tips
Whether you work with a mortgage broker or a mortgage banker, the most important thing is to do your due diligence and check on the reputation and reliability of the person you choose.
- Get recommendations from friends and colleagues who have recently applied for a mortgage.
- Meet with more than one lender to get answers to your questions and to determine which one you feel most comfortable with. You will be sharing all your intimate financial information with this person and will need to feel confident in their honesty and ability to find you the best mortgage loan for your circumstances.
- Check references. Mortgage brokers can be found through the National Association of Mortgage Brokers. The Fair Mortgage Collaborative provides certification for both mortgage brokers and mortgage bankers. In addition, the Certified Mortgage Planning Specialist Institute certifies both brokers and bankers. Also, most states now require mortgage brokers and bankers to be licensed through the National Mortgage Licensing System.
The Bottom Line
While working with a mortgage broker might save you a little time, if you have a good relationship with a mortgage banker at your local bank or credit union, you might want to try there first to check on your loan options before shopping around to other banks or a broker. The best thing any consumer can do is to check with at least two places to compare loan rates and fees before committing to any loan program.
All mortgage loan applicants, even if they opt for a mortgage broker to do most of the legwork, need to make sure they compare all aspects of a loan program before making such an important choice. (To learn more, see our Mortgage Basics Tutorial.)
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