Not all lenders are created equal. Knowing the difference between the different types of lenders and how those differences impact you could save you money and provide you with more options. Most people think of mortgage brokers when they think of talking with someone about obtaining a mortgage but mortgage brokers are only one type of lender available to assist you.
Mortgage brokers are individuals who originate mortgage loans with funds from mortgage banks. Basically, mortgage brokers do not use their own money to fund your mortgage transaction but instead rely on a variety of banks to do that for them (and ultimate you). Mortgage brokers typically have the ability to shop for the best mortgage on your behalf from the variety of mortgage banks. Seems logical that you would hire a mortgage broker who is educated, experienced and does it every day to shop around for the best mortgage for you instead you taking the time to cal a bunch of mortgage banks and getting rate and fee quotes, right? Well, maybe.
While mortgage brokers do have the ability to shop around for the best mortgage loan they also have relationships with certain mortgage banks that provide perks. Some perks may include shorter underwriting time, higher income, or lower fees. While some of these could benefit you, the buyer, they could also benefit the broker enough that they would pass up an opportunity that would benefit you to ultimately benefit themselves. That is not always the case, but brokers are performing a balancing act to get you a good deal while still taking care of themselves (human nature, if you ask me).
The disadvantage of mortgage brokers is that they do not underwrite the mortgage approval. The underwriting is left up to the mortgage banks to complete and notify the mortgage broker of the decision. Similarly, the closing/funding of the mortgage is done by the mortgage bank instead of the broker. This limits the control the broker has over the transaction.
Mortgage bankers, unlike mortgage brokers, fund the loans they originate with their own funding source. Typically mortgage bankers have what is called a warehouse line. Warehouse lines are like bridge loans, or temporary financing, that allows the mortgage banker to get a loan to fund your mortgage and then find another mortgage lender to buy that loan from them, thus paying off the warehouse lender. This can get quite complicated and confusing, but the main idea to be aware of is that mortgage bankers fund with either their own funds or through the funds of a warehouse line. So why is this important?
The reason that having a funding source is that the mortgage banker can maintain control over the underwriting and closing/funding of the mortgage while the mortgage brokers do not. Mortgage bankers may have priority over the brokers who send their files to be underwritten at these banks. Many mortgage banks have two entirely separate departments working to underwrite, close and fund broker’s mortgages and their own mortgages to eliminate this type of situation. Mortgage bankers can, however, have more direct access to those that are working to underwrite and close their file while a broker typically has to work through a wholesale representative (sales person to get brokers to use their bank).
The disadvantage of some mortgage bankers is the potential for problems with their funding source. Many of you probably heard about the tales of American Home Mortgage. From my understanding, many of their customers faced situations at the closing table, ready to close on their mortgage and home purchase were left moneyless because American Home Mortgage’s warehouse line would not lend them the money necessary to fund the loan. This situation caused many mortgage bankers to work towards obtaining two warehouse lenders, instead of just one, to avoid similar situations in the future.
Hybrid Banker/Brokers – Correspondent Lenders
Correspondent lenders are those that are somewhere in between or, possible, both a banker and a broker. Correspondent lenders have a funding source, typically through a warehouse line (or two, or three) but also have the ability to broker to other mortgage banks, if they so choose. Correspondent lenders typically have agreements with larger mortgage banks to enable them to underwrite and close on behalf of that larger bank. Here is an example:
- Buyer goes to ABC Mortgage (a correspondent lender)
- ABC Mortgage originates a Wells Fargo (for purposes of explanation and example only) mortgage
- ABC Mortgage underwrites and closes (with Wells Fargo’s authorization) the mortgage
- ABC Mortgage used XYZ Warehouse Lender to fund the mortgage
- Wells Fargo Purchases buyer’s mortgage after closing from ABC Mortgage
- ABC Mortgage pays back XYZ Warehouse Lender with funds from Wells Fargo
In this situation the mortgage company funded with the own money while maintaining control over underwriting and closing knowing, the entire time, that a larger bank would purchase the loan after closing.
Let’s say that a correspondent lender decides that either there is a better opportunity for him or the customer by brokering the loan elsewhere. A correspondent lender typically has the ability to do that, while a true mortgage banker normally does not. The best of both worlds, right? Again, similar to brokers, correspondent lenders create relationships, or comfort levels, with certain mortgage products and generally use those same mortgage products over and over, even if the loan officer or customer could benefit from a loan to be brokered.
For the purpose of full disclosure, I am a correspondent lender.
A State of Confusion
So now that you understand the difference from an industry point of view, I will confuse you by sharing what the State of Colorado has designated as a mortgage banker versus a mortgage broker:
Mortgage bankers are loan officers who work for a bank that has banking functions within the state such as bank branches with bankers, ATMs, etc.
Mortgage brokers are all other loan officers in the state. Mortgage brokers, even is they have their own funding source (correspondent lenders), are required to be licensed in the State of Colorado and must abide by certain rules set forth by the state.
I hope this helps to clear up your questions about what the differences between the types of lenders are. Here are a couple of links I found when writing this article will help to fill in certain areas I did not discuss:
- Pros & Cons of Mortgage Bankers and Mortgage Brokers
- Banker or Broker? It Doesn’t Matter
Lending A Hand