There are three different types of entities that offer mortgage money to the consumer. The bank-which is familiar to most people, a mortgage bank, and mortgage brokers. Most people don't spend a lot of time pondering the differences. But there are differences and they are significant.
The place most borrowers begin their mortgage search is normally the bank where they keep their accounts. It seems logical, they need money. Where do you find money? At the bank, of course. Depending on the bank, there may or may not be multiple programs that cover a large variety of people and their needs. For instance, Wells Fargo or Bank of America will probably have access to most available loan programs-your neighborhood Main Street bank may not. Smaller banks have fewer resources, so don't are often limited in the loan choices. The benefit of a small bank is that they may know their depositors personally, so have the ability to keep the loan "in the vault" for a period of time rather than sell it on the secondary market if they know the client and feel it is a safe bet, even if the characteristics of the loan or credit profile is outside comfortable parameters. And, banks that don't have all programs available may try to cram borrowers into programs that aren't as good for them as a program they don't have-VA mortgage loans come immediately to mind. Not every bank will lend on a VA loan and may try to put the veteran into another product that doesn't possess all the advantages as the VA loan.
Banks being somewhat conservative organizations, may add what is known as overlays to a loan program. I.E. adding rules over and above what the program requires for approval-such as requiring a higher credit score than what is required by the program, or more assets for down payment etc.
Mortgage banks are entities that do not have depository accounts. Their sole purpose is to originate and fund mortgages. Quicken Home Loans is a well known example of a mortgage bank. Mortgage banks, like a regular depository bank may only have one source of money. That being the case the attributes of the loan must conform to the rules that the investors in the mortgage bank choose to extend. These overlays can be stricter than the actual rules of the programs they carry.
Mortgage Brokers don't have assets that they lend. Mortgage brokers function just as a stock broker or real estate broker functions. They are the intermediary between you-the consumer, and any number of lending sources. Some of those lending sources are the same depository banks or mortgage bankers that have retail shops. The money that is available to mortgage brokers is known as whole sale money. And it means just what is says. Any business that has a retail outlet has to purchase their wares from a wholesaler. In the case of mortgage brokers what is being purchased is money which may be at a different price than what is being offered at the retail bank down the block. In fact, it is somewhat interesting to note that I have had clients come into my office with a quote from a bank from whom we obtain wholesale money. Many times our rate from the same entity is lower than the retail operation.
Why do I need a middle man, you ask. One, for the reason I mentioned above. Many times a broker can meet or beat the best offer you can receive at a bank. Second, since brokers have more than one source of money, if the characteristics of a particular buyer don't fit one lender's profile, they may fit the profile of another. Brokers often have more flexibility. So to put it succinctly-more choices, more chances for approval.
Typically a mortgage broker isn't going to be able to call around to every lending institution for quotes on your loan. Brokers have relationships with specific lenders-not access to all of them. In case of our company we choose lenders that fulfill different needs in the market. We have one that has a little more latitude with unusual employment situations, while another will allow a lower credit score in some instances or different variations in credit requirements. Not all borrowers present the same credentials when applying for a loan. It is important to be able to assist as many as possible with their individual needs.
Whether the entity is a bank, a mortgage bank or a broker-all can easily approve and close the top tier of borrowers. However there are many borrowers in the market who while not possessing extraordinary credit or assets, are qualified buyers. It is important that they have access to mortgage money also.
Granted, I have a biased point of view but I have closed many loans with no trouble that were previously turned down by a bank or mortgage bank. So the take away is this: More choices, more chances-stop at your mortgage broker first. You may be very pleasantly surprised.
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