To correctly answer the Bank versus Broker question, we must first understand the differences and the common misconceptions.
- Banks are direct lenders, meaning the entire loan process is done in-house.
- They offer only their in-house loan products.
- The loan officers that work for the bank and are usually paid a salary, plus commission.
- Their lending guidelines tend to be more restrictive.
- They are not required to disclose the income generated from the loan.
- Shopping loan options at multiple banks requires multiple applications.
- Borrowers go through multiple points of contact for the process, and generally have longer wait times.
- Loan officers at banks are not required to take introductory mortgage education courses, and are not required to pass the State Board tests, as they are protected under the regulatory requirements umbrella of the financial institution.
- Independent brokers work as intermediary between the borrower and the lender.
- All fees and income generated are disclosed to the borrower.
- They have a wide range of loan products available.
- They can shop multiple lenders with one loan application, which allows the broker to find the lender and loan product with the lowest rates and fees – typically lower than banks.
- Lending guidelines are more flexible with more exceptions.
- Brokers are paid by commission per loan, by the lender.
- Borrowers go through one point of contact for the process, generally more experienced and much shorter wait times.
- Independent Loan officers are required to take introductory mortgage courses meeting an hour minimum requirement for loan knowledge, rules, and regulations.
- They are also required to pass the State Board test to receive a license, and take annual continued education to keep their license valid.
Ed Shares his Insights
When it comes to getting a mortgage loan most consumers believe a bank will provide: a quicker process, lower rates and fees, a more trustworthy institution, direct connection to the underwriter, and discounts for being an existing customer.
When it comes to getting a mortgage loan most consumers believe a broker will provide: custom loan options, more personal contact, more convenience, higher rates and fees, a longer process, and less familiar/trustworthy institutions.
It is also common for consumers to assume that banks are better for stronger borrowers with higher credit scores and reserves, and brokers are better for weaker borrowers with lower credit scores and less cash.
While many of these assumptions may have been true in the past, today, many are misconceptions. For example, mortgage brokers are now able to: offer the same loan products (as banks) with lower rates and fees, they offer quick approvals and closings, they work with sound institutions, and have much more experience than loan officers at banks.
Increased mortgage lending regulations and oversight have resulted in a “weeding out” of many of the mortgage brokers in the industry. Also, changes in the market have made it much more difficult to make a living as an independent mortgage broker (gone are the days of 100% no income verification loans and constant refinance requests). The mortgage brokers that remain today are experienced, highly educated and well-trained, honest, and extremely versatile.
Because banks are not required to disclose the income generated on the loan, the only way for a consumer to know if they are getting a good deal is to apply with multiple banks (and compare loan estimates side-by-side) or to apply with a mortgage broker and compare the rate and fees of their loan estimate.
Since the housing and market crash in 2008, banks are now required to carry larger cash reserves, and they increase these reserves by charging higher fees (for all bank services) and by increasing profit margins on loans, including mortgages. While bank fees for mortgages are similar or slightly lower than those from brokers, their rates are generally higher. Higher rates mean more income per loan, sometimes double that of brokers (brokers have virtually no overhead compared to a brick and mortar bank).
Because most brokers rely on referrals for future business, they are focused more on customer service and a quick, simple, and easy process. The borrower must have a good experience if they are to refer their family and friends. Banks have enormous advertising and awareness campaigns and more tenure in the industry, so they are not reliant on a high percentage of satisfied customers.
In summary, mortgages generated by brokers make up about 30% of all mortgage loans and this percentage is rising drastically. More consumers are discovering that a good broker can provide a lower cost customized loan with a quicker, simpler, and more personal process. If you are a borrower that only feels comfortable working with your bank and you are not sensitive to costs or personal service, a bank may be your best bet. For everyone else, it makes sense to ask for a referral to a great mortgage broker.