Brokers vs Banks

Mortgage Brokers vs. Mortgage Banks

“Mortgage originator” as defined by the Investopedia Dictionary:

• “An institution or individual that works with a borrower to complete a mortgage transaction. A mortgage originator can be either a mortgage broker or a mortgage banker, and is the original mortgage lender. Mortgage originators are part of the primary mortgage market. “
There are differences between mortgage brokers and mortgage bankers. Simply put, Mortgage brokers work with other financial institutions to bring about the mortgage. Mortgage brokers do not close mortgages in their own names. Mortgage bankers close mortgages with their own funds and close in their own names.

Mortgage Broker
Definition of a mortgage Broker from Investopedia Dictionary:
• “An intermediary who brings mortgage borrowers and mortgage lenders together but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower and passes that paperwork along to a mortgage lender for underwriting and approval. The mortgage funds are then lent in the name of the mortgage lender. A mortgage broker collects an origination fee and or a yield spread premium from the lender as compensation for its services.”

A mortgage broker, or a loan officer working for a mortgage broker, is employed by that broker, not by a bank. The broker is not lending money, nor is it representing a company that is lending the money on the transaction. The broker is simply an intermediary whose job is to arrange the financing. The broker accomplishes this by working with multiple funding sources, such as banks, mortgage lenders, private lenders, etc. In other words, their purpose is to find funding for the transaction. The source of that funding will vary while a loan officer for a bank, credit union, etc., will just represent his company directly, and only recommend their products and programs.

Definition of a mortgage Banker from Investopedia Dictionary:

• “A company, individual or institution that originates mortgages. Mortgage bankers use their own funds, or funds borrowed from a warehouse lender, to fund mortgages. After a mortgage is originated, a mortgage banker might retain the mortgage in portfolio, or they might sell the mortgage to an investor. Additionally, after a mortgage is originated, a mortgage banker might service the mortgage, or they might sell the servicing rights to another financial institution. A mortgage banker’s primary business is to earn the fees associated with loan origination. Most mortgage bankers do not retain the mortgage in portfolio.”

The mortgage Banker or loan officer for the mortgage banker, (NOTE: the loan officer is an employee paid by that bank,) is the “mortgage originator”, and are the representatives for the source of the funds. In this example, the source of the funds being their bank which is directly lending money on the transaction.

How Are Mortgage Brokers Paid?

Front-end compensation
A mortgage broker gets paid up front by the borrower for their work. Examples of this are the direct fees paid to the borrower such as the origination fee, underwriting fee, processing fee, warehouse fee, discount fee, etc. These are generally referred to as “points.” The professional mortgage broker will itemize these for you.

Back-end compensation
One way mortgage brokers get paid is via a yield spread premium (YSP). The YSP is the commission the bank or mortgage lender provides in exchange for a given mortgage rate above market. The mortgage broker gets more money depending on how much he or she increases the interest rate. The interest rate would typically be increased if the borrower does not want to pay closing costs out of their own pocket. If a borrower chooses not to pay out-of-pocket expenses, the broker may possibly boost the interest rate above the qualifying rate to make money on the back-end via YSP so he or she can cover the closing costs and still make money.

(NOTE: YSP may also be referred to as “par-plus pricing”, “rate participation fee”, “service release fee”, and many other variations, so keep an eye out for it on your documents.)

How do you choose a mortgage broker?
A mortgage broker is a professional who is doing a lot of work for you. Their job is to coordinate the lender, the title company, the appraiser, the insurance company, etc. The mortgage broker is also aware of market conditions and can find the best lender for you; the situation with lenders is always changing. The old saying “you get what you pay for” holds true for mortgage brokers. Don’t just choose the one who is least expensive. Be sensible about whom you choose. For example, if he or she is offering a fantastic deal, one that is way below the current market price, be very careful.

In real dollars, how much does a mortgage broker get for making a deal?
Mortgage brokers currently get paid 1 to 2 percent of the deal. Since mortgage brokers are the middlemen between borrowers and lenders/banks, either party can contribute to the broker’s fee. FOR EXAMPLE: the mortgage broker may get paid via the yield spread premium (YSP). (As stated above, the YSP is the commission the bank gives in exchange for a given interest rate above the norm. when the borrower does not want to pay any out of pocket expenses to cover the closing costs. In this way, the mortgage broker makes points/commission, on the back end of the loan.)

Summary
By making use of a mortgage broker you will make life simpler for yourself. The process of coordinating all the entities involved is a lot of work which includes extensive record keeping, communications, etc. A mortgage broker is an experienced professional and should make the process of obtaining a mortgage much easier for you.