Faster. Lower. Better.
These are the advertising keywords you probably see every day. It seems all mortgage companies advertise the best service, lowest rates and closings in the blink of an eye. One of the biggest mistakes loan shoppers make is assuming that everyone is the same.
The three types of companies are a bank, direct lender or mortgage broker. When shopping for a mortgage, you have many choices. By knowing the difference, you will identify which company type is right for you and how to get a better loan.
Mortgage lending differences
While there are many differences between the three types of institutions, there is one common factor. A conventional loan from a bank, direct lender or mortgage broker is the same Fannie Mae or Freddie Mac loan. The only difference may be the interest rate and closing costs.
Banks and direct lenders lend money and underwrite loans, brokers do not. Banks use their own money or borrow from under banks or even the Federal Reserve. Lenders have access to one or more lines of credit from a bank or financial institution. Think of this like a big credit card.
Think of this as a credit which can fill up and max out. These lines of credit can very profitable or costly. When banks and lenders take on the responsibility of underwriting a loan, they accept the risk of an unmarketable loan. This is a very expensive proposition. Often scrutinizing and requesting more paperwork. A broker does not lend directly or have a line of credit.
Banks and direct lenders normally only have one option, their option. Brokers work with multiple wholesale lenders and have access to multiple loan options. The wholesalers compete for the broker’s business. These wholesale channels are not open to the public, you need a broker for access.
How Loan Pricing Works
According to the CFPB, nearly 50% of new home buyers do not shop for a mortgage1. For example on a recent loan, we are competing with a bank and we are .25% better in rate and a similar cost.
The principal and interest payment on a $375,000, 30-year Fixed-Rate Loan at 4.500%, $150,000 cash-out, and 38% loan-to-value (LTV) is $1900.07 with 0 points due at closing. The Annual Percentage Rate (APR) is 4.553%. The principal and interest payment do not include property taxes and home insurance premiums, which will result in a higher actual payment. Rates current as of 3/8/2018.
The principal and interest payment on a $375,000, 30-year Fixed-Rate Loan at 4.750%, $150,000 cash-out, and 38% loan-to-value (LTV) is $1956.18 with 0 points due at closing. The Annual Percentage Rate (APR) is 4.750%. The principal and interest payment do not include property taxes and home insurance premiums, which will result in a higher actual payment. Rates current as of 3/8/2018.
A bank and direct lender set the interest rates and therefore the profit. Brokers are compensated by the wholesale lender. Operating as a bank or lender is costly. Lending money and lines of credit cost money. If there is a loan buy-back or cannot be sold, it’s very expensive. To fund loans, you need to hire funders and underwriters. This additional overhead is priced in the interest rate or closing costs and is passed along to you.
Brokers tend to have lower pricing compared to banks and direct lenders. Brokers do not have the overhead of underwriters, funders or lines of credit. Brokers do not have the marketing and management overhead either. You probably will not see commercials from brokers on TV. There will be no celebrity endorsements. You will not find layers and layers of management or administrative overhead. Brokers tend to operate with much less overhead. As a result, brokers are often able to offer lower rates and costs compared to your bank or direct lender.
What about service between a bank, direct lender or Mortgage Broker?
A bank, direct lender or mortgage broker will follow a traditional loan fulfillment model. A banker/loan officer takes your application. Your loan is then handed off to a loan processor. A typical processor has 30-40 files to work on every month. The daily attention given to a file is therefore limited.
Getting them on the phone is usually difficult. To make matters worse, the processor is usually located in another state, in a different time zone and works in a processing call center. The odds are stacked against you because another person is delivering on the promises of the banker.
How we deliver better mortgage rates
We designed Candor Mortgage to operate with minimal overhead. We don’t pay our people a commission. Commission structures are used to manipulate people. Plus, someone will probably put their commission before your needs. We merged the role of the processor and loan officer to create a one-person support system. The same person who helps you initially is also the same person who helps close your loan. It’s really that simple.