Is a mortgage broker better than a bank?

What is the difference between a mortgage broker and a bank?

A bank or credit union is a direct lender. It makes the loan with its own money, and you repay it under the loan terms. A mortgage broker does not lend money. The Consumer Financial Protection Bureau (CFPB) says a broker helps you find lenders or loans and is paid a loan-specific fee.

Federal rules define a mortgage broker as a loan originator who is not an employee of the lender on that loan (12 CFR 1026.36(a)(2)). Some companies act as both lender and broker, so the CFPB suggests you ask whether a broker is involved in your loan.

How do brokers work with wholesale lenders?

Lenders that fund loans brought to them by brokers are often called wholesale lenders. The broker takes your application, collects your documents, and compares what different wholesale lenders will offer for your situation. The lender you pick does the underwriting, funds the loan, and is named as the lender on your paperwork. The broker is listed separately.

Federal rules also give brokers a safe harbor against steering claims. To use it, the broker gets loan options from a significant number of the lenders it regularly works with. For each loan type you are interested in, it shows you the option with the lowest interest rate, the option with the lowest total points and origination fees, and the lowest-rate option without risky features such as a prepayment penalty, negative amortization, interest-only payments or an early balloon payment (12 CFR 1026.36(e)). You can ask a broker to show you those three options.

How are mortgage brokers and loan officers paid?

On a covered mortgage loan, broker compensation is generally either lender-paid or borrower-paid. If you pay the broker directly, the federal compensation rule generally prevents another person from also paying that loan originator for the same transaction.

Borrower-paid broker charges are itemized on the Loan Estimate and Closing Disclosure. Lender-paid compensation to a third-party broker is not separately itemized on the Loan Estimate; it is shown as paid by others on the Closing Disclosure. Ask how the broker is paid and compare your actual rate, costs and lender credits.

What do the loan originator compensation rules protect?

The CFPB's loan originator rules apply to bank, credit union and broker loan officers. Key protections:

• Pay cannot be based on a loan's terms, such as the interest rate, or on a proxy for a term. Pay may be a fixed percentage of the loan amount (12 CFR 1026.36(d)(1)).
• A loan officer may not steer you into a loan because it pays them more, unless that loan is in your interest.
• Loan officers must be licensed or registered under the SAFE Act. Their name and NMLS ID must appear on your application, Loan Estimate, Closing Disclosure, note and security instrument (12 CFR 1026.36(f) and (g)).

The CFPB's Your Home Loan Toolkit puts it simply: it is illegal for a lender to pay a loan officer more to steer you into a higher-cost loan. It also warns that a loan officer is not necessarily shopping on your behalf. That is true at a broker or a bank, which is why your own comparison matters.

When might a broker be a good fit?

• You want to see several lenders' pricing without filling out several applications.
• Your situation is not a simple fit for one lender, such as self-employment income or a unique property, and you want options from lenders with different guidelines.
• You want one person to manage the process while still comparing lenders.

For example, West Capital Lending, the brokerage where Shawn Way works, has access to more than 180 lenders. Access to many lenders is not a promise of a lower price. Check the Loan Estimate.

When might a bank or credit union be a better fit?

• Your bank or credit union offers a relationship discount or a program that wholesale lenders do not. The CFPB toolkit suggests asking lenders about discounts, such as for completing a homebuyer education program.
• The bank keeps certain loans on its own books and has a product that fits you, such as a loan type it does not sell to investors.
• You prefer to deal with one institution for your accounts and your mortgage.
• Its Loan Estimate simply comes in lower for the same loan on the same day.

The CFPB lists community banks, credit unions, mortgage brokers, online lenders and large banks as typical places to get a mortgage. It recommends getting Loan Estimates from at least three lenders.

What should you ask a broker or a bank?

1. Are you a broker or the lender on this loan?
2. How are you paid on this loan, by the lender or by me, and how much?
3. Can you show me the lowest-rate option, the lowest-fee option, and the lowest-rate option without risky features?
4. What is your NMLS ID? You can look it up on NMLS Consumer Access.
5. Is the rate on this Loan Estimate locked? If so, until when?
6. What would the loan cost with no points, and with a lender credit?