The world of home lending has changed dramatically. In the 1950’s if you wanted a home loan you went to a bank, sat down with a branch representative, showed them proof that you had 20% or more down payment and signed up for a 15 or 20 year fixed loan. The file went to the bank’s board of directors for review and was approved or not. In 2000 if you had a 500 credit score, open collections and wanted to buy a home on an interest only loan with little or no money down, that was not only possible, it was probable. There were programs that were fixed, adjustable, negative amortizing or any number of permutations. That is not the case today.
Lending today is a significantly more conservative arena. While you may still be able to obtain financing with a less than stellar credit and income profile, the cost of that loan will be significantly higher and the documentation needed to get approved will seem monumental. Those who fund home loans are not only concerned with the quality of the borrower, they also want to insure that in the future, under no circumstance, will they have to repurchase the loan because of a defect in the loan file that was missed. This means much more stringent underwriting and much more paperwork for anything identified as “outside the box”.
You have large deposits that are not payroll? You changed jobs recently or have a gap in your employment? You are getting your down payment as a gift from your parents? This means more documentation.
The guidelines that most Lenders start with are those of Fannie Mae. This insures that the file can be sold to them for servicing and that is how the money that they lend is replenished after closing. Beyond that each company may place their own guidelines on top of that; these are called overlays. A Lender is bound to their own level of risk allowance in building these guidelines. A Broker is bound only by their intimate knowledge of the guidelines and overlays of a particular Lender that they place your file with.
So as you can see already, it is not a level playing field. Brokers have the ability, through their relationships, to place your file with a number of Lenders who may have guidelines that will allow your file to be approved with little or no additional paperwork. Lenders are at the mercy of the risk tolerance of the owner and their sources of funding (yes that’s right Lenders borrow the money they provide to you from someone else at a particular interest rate based on the time the money is needed and paid back).
Both Brokers and Lenders can gather information on your financial situation (take an application and pull credit); can help you better understand the requirements; can explain disclosures; and can guide you through the process. However, there are some basic differences between mortgage Brokers and Lenders:
Sources of Funds
Brokers may represent multiple sources as opposed to Lenders who are a single source. Brokers act as your guide to help you select the best solution that fits your needs. Many Lenders in the market today also act as Brokers for those files that do not fit the profile of their guidelines. This is more common than in the past. The world of a Broker is ideal customer service standpoint where they can selection from a wealth of products for any particular customer profile while the Lender model allows the company to make their own lending decisions.
Mortgage Fees
Lenders charge certain fees and costs for processing the loan. Whether you use a Lender or Broker, your cost will be dependent upon how well qualified you are for the type of mortgage you are applying for. The higher your credit score and the larger your down payment and the lower your debt to income ratio is the lower the overall cost; this is called Risk Based Pricing.
Mortgage Rates and Guidelines
Brokers may be able to offer lower rates than Lenders depending on their profit model. All mortgage rates are based on what happens in the secondary market. On average a Broker will have a pricing advantage over a Lender because Brokers do all of the work on the loan, from origination to qualification to submission to closing so the source of funds selected need only underwrite the file. A professional Broker knows where to place a loan to get a successful approval and will not waste your time or theirs simply submitting the file and hoping for a yes answer. They will know that the file is approvable before they submit this and as a result are usually offered more attractive rates and costs from the lending source for their professionalism (this is called Pull Through: what percentage of the loan files that they submit are approved). A Lender will have overhead like payroll for the personnel involved with the process; building and additional costs of doing business that must be passed along to the borrower. This is normally done as a slightly higher rate offering. A Broker will be able to find the program that best fits your specific loan needs and can submit your loan to the correct Lender. A Lender will either approve or deny your loan with little or no alternatives. A Broker will not waste your time and needless paperwork to submit a loan to a Lender unless they know that the loan is approvable and will close.
Revenue
One of the more recent impacts on mortgage lending with the advent of the Internet is a customer’s desire to know how the Broker or Lender gets paid. In the past many customers were either ill-informed or unaware of how their representative got paid for their service. There was a time where most loans produced enough revenue from simply being created that the service provider was paid out of that. Or the loan amounts were increased to cover profit. Profit can be created in many ways in the mortgage business. A solid professional will not hesitate to tell you how they are getting paid and what the true cost is to you. With the creation of the National Mortgage License System and the Consumer Federal Protection Bureau the government oversight and requirements for how a Broker, Lender or Loan Officer gets paid have changed dramatically. There are now limits and checkpoints in the system to limit the risk to both the Lender and the borrower.
For a Broker they are paid a percentage that is listed on the settlement statement at closing. Any fee or revenue that is paid to the Broker is listed as such on that document. This may include Origination, Fees or Yield Spread Premium (revenue created when the loan is sold based on the future cash flows from payments and interest). The total of these fees, depending on State and Federal guidelines, may range up to 6% of the loan amount and type of loan.
Lenders are paid in the same ways however a Lender need not disclose the Yield Spread Premium because they are using their own source of money to fund your loan and the actual profit will not be known until the loan is sold, if ever. Some Lenders retain the file and receive payments themselves which gives them the revenue from the payments and interest instead of the premium when the loan is sold.
Final Thoughts
We hope that this has provided you some valuable insight into our industry. Remember that any representative of a Broker or a Lender must be licensed and you can review their history, employment and confirm their qualifications through the NMLS website. In the end the best solution for your financing needs is a professional who understands what you want to accomplish, is knowledgeable and capable in their market segment and understands that it is your choice who you do business with and that decision is very important to their success.