DO I NEED A  MORTGAGE BROKER? By David A. Chodack (wizard@contractwizard.com) This is a legitimate question that many first-time Buyers ask themselves when they purchase a property and start looking for a mortgage. "Would I be better off going directly to a Bank or  Savings and Loan Association? Would I save the Broker's commission and get a better rate that way? Or will the broker be able to shop around and get me a better deal by checking with several lenders? The best answer to that question is, Sometimes you are better off working with a broker and sometimes you're better off going to a direct lender. There is no easy answer which works for every one in every situation. First of all,   Not all Lenders work with Brokers. Therefore, you might actually be limiting yourself if you do.  You might  miss out on some lenders who only deal directly with borrowers and one of them might have just the loan for you. IN THEORY, THE LENDER PAYS THE  BROKER'S COMMISSION Lenders who do work with brokers, usually have a  two-tiered rate system. They have Wholesale rates for the Brokers they work with and then they have Retail rates, which they offer to Borrowers who come to them directly. The difference between the  Wholesale rate and the Retail rate is the points or loan fee,  which is usually anywhere from one quarter percent, to two percent of the loan amount.  For example, the local bank or savings or loan is offering you a 30 year fixed rate loan at  7.5% interest, with a loan fee of two points, two percent of the loan amount. If you go to a loan broker who deals with this same lender, the lender offers them that same loan at 7.5% interest and no loan fee. They offer the loan to  you for the same two points you would pay if you went direct to the lender and they keep those two points  as their fee. In other words,  the Lender pays the Broker's commission and you wind up paying the same rate whether you use a broker or not. Why do Lenders offer Brokers a better rate than they offer to Consumers like you? Because Brokers do a lot of the Lenders' work for them. First of all, they bring the Borrowers and save the Lender money for marketing. Secondly, the Broker qualifies borrowers and passes on only those who meet the lender's guidelines. This saves the Lender time and money on paper work. In some cases, you could wind up paying less by using a broker. The broker may agree to cut his commission and rebate part of the difference between the Wholesale and Retail rate. On the other hand, f you go directly to the lender, they are not about to bargain. If you think you can get a better rate somewhere else, that's fine. They have plenty of business. Right? DIRECT LENDERS SEEK LONG-TERM RELATIONSHIPS Wrong.  In today's environment where many lenders are  trying to be all things to all people, they look at borrowers a lot differently than they used to.  Now most lenders are not only anxious to profit from loans, they are anxious to develop relationships with customers. They not only want to attract deposits, they want to sell mutual funds and other investments. They want to be your overall financial advisor. This is likely to make them more competitive in the loan market. They might be offering that 30 year loan at 7.5% interest with two points, but they may well be willing to negotiate. If you are a regular customer - or might be one in the future - they might be willing to cut the interest rate and/or  the points in order to earn your business. BROKERS ARE FREE TO CHARGE WHAT THE TRAFFIC WILL BEAR If you go to a  broker, he or she also has flexibility. If he really wants your business, he or she has the option to take less than two points for his fee. The Broker can offer you that same loan with a loan fee of one, or one and a half percent.  Or, he or she can use part of that two percent loan fee to buy down the interest rate and offer you the loan at say, 7% interest, with a fee of two points. The problem is that the broker may not pass any of the savings on to you. In fact, there is nothing stopping the broker from charging you 7.5% interest and more than two points  for that loan.  Legally, the broker can charge you whatever he thinks the traffic will bear, even three or four points if he thinks you will pay it. Or, the broker can charge you more than 7.5% interest and get a rebate from the lender. If he charges you 7.5% for that loan, then the lender pays the broker nothing. He makes all his money from the points he charges you. But, if the broker charges you say, 7.75% or even 8% for that loan, then the lender will pay the broker anywhere from a quarter point to a whole point or more, on top of whatever points the broker may charge you. You may actually wind up paying more for the loan if you do go through a broker unless you have shopped around and  know what other brokers and direct lenders are charging. YOUR LOAN AGENT SHOULD BE YOUR  ADVOCATE But forget about saving money on the interest rate or points  Some people would say that the most important reason to use a Mortgage Broker, is to have your Broker as an advocate, someone to speak and act on your behalf. When you go directly to the Lender, you are assigned to a Loan Officer who works full-time for that Lender.  He or she can only offer you the programs offered by that one Lender.  He or she can not tell you that some other Lender might have a program which would better suit your needs. If you don't meet the Lender's guidelines and are turned down, the in-house Loan Officer might not be able to do anything for you. They can't threaten to take their future business elsewhere and they can't take your application to another Lender. All they can do is turn you down and say they are sorry. An  independent Broker works with several Lenders. They know the peculiarities of each Lender - what types of loans they prefer and what types of loans they are likely to turn down - and they can steer your loan to the Lender who is most likely to approve it. If you are turned down, they can often get you qualified by writing Letters of Explanation  for poor credit, insufficient income, too many bills, or other minor problems. Independent mortgage Brokers can also take your application - and if necessary, their other business as well -- to other Lenders. They do not drop you simply because one Lender turns down your application. They find workable alternatives, instead. They get paid by the Lender, but they don't work for the Lender. They work for you. FAMILIARITY CAN BREED SUCCESS These are the standard arguments in favor of mortgage brokers, but they are all over-simplified.  Whether he works in-house for one direct lender, or for a broker who works with many different lenders, the loan agent should always be your advocate. Whether he or she is on salary, commission, or a combination of both, he or she gets paid for closing loans successfully.  If your application gets submitted only to be turned down, then the loan agent is not really doing his or her job. If he or she works for a direct lender, this can be to your advantage for several reasons. First of all, not all lenders share all their programs with brokers. Some programs are reserved for in-house loan agents only. An in-house loan agent working for a direct lender may have a program which can benefit you, which no one else - no other direct lender and no mortgage broker - has access to. This is designed to give them a competitive edge and help win loyal customers. Secondly, an in-house loan agent knows the lender's guidelines, standards and peculiarities in a way that no mortgage broker can. Since he or she has only one lender to deal with, it is a lot easier to become an expert in dealing with that one lender and what they want.  If your loan application does not meet the lender's criterion for any reason, the in-house loan agent should be able to spot this right away instead of wasting time. If possible, he or she will tell you what you have to do to make yourself qualify. If letters have to be written explaining credit, down payment, or income  problems, then the in-house loan agent should know exactly how to word them and who to address them to for maximum impact. They are part of a team, working together to get your loan approved and keep it in-house, so you will become a satisfied and loyal customer. IN-HOUSE FUNDING MEANS MORE FLEXIBILITY In many cases, direct lenders can offer better, more flexible  terms than mortgage brokers because they keep the loans and fund them in-house. The lenders who deal with mortgage brokers most often sell their loans on the secondary market. The loans will be purchased  by the Federal National Mortgage Association, or Fannie Mae. Fannie Mae then packages these loans and uses them as collateral for securities which it issues on Wall Street. This means that your loan must meet not only the lender's standards, but Fannie Mae's standards as well. You must meet minimum requirements for income, credit and down payment in order to be approved. Fannie Mae sets the rules and the individual lender has very little flexibility. On the other hand, lenders who make their loans directly, without going through brokers and fund them in-house, without selling them on the secondary market, have more flexibility. They don't have to answer to any outside underwriters or follow Fannie Mae's strict guidelines. If they want to be more lenient with their income, credit, or down payment requirements, then within reason, they are free to do so. This means they might very well approve your loan where  Fannie Mae lenders might have to turn it down. If there is no way to get your loan approved, the in-house loan agent should realize this more quickly than an outside broker would. He or she can usually steer you to another lender, just the way a broker would. Lenders talk to each other. They know which lenders are likely to approve loans which they have to turn down. An in-house loan agent gets no commission from referring you to another lender, but they do build up good will this way. So, whether you should choose a direct lender or a mortgage broker, really comes down to a personal choice, with pros and cons on each side. WHAT HAPPENS IF YOU DON'T QUALIFY FOR AN "A" PAPER LOAN It's the end of the world. You've been to all the lenders you know - direct lenders and mortgage brokers - and you've been turned down for a loan. Either your credit is bad, or your income is not high enough to qualify. Either way, they have all said "No!" What do you do now? Do you curl up and die from shame and disappointment? No, you just  sit  down and try to figure out why you were turned down. Is it a problem which can be remedied by a letter explaining your situation? Was there a valid reason (illness or loss of a job due to no fault of your own) why you were late making your payments? SUBMIT A WRITTEN EXPLANATION If this is the case, then you write a letter and explain exactly what happened. Convince potential lenders that it was a one-time occurrence and it is not likely to happen again.  Your loan agent should help you with this and tell you exactly what to say. SUB PRIME LENDERS If this does not  work, it is still not time to give up. You just go looking for a sub prime lender. This is a lender who specializes in making loans to people like you, who have been turned down by the "A" paper, or "Prime" lenders. Some of them will only loan to people with slight credit or income problems. Others will loan to almost anyone who is not currently involved in a bankruptcy. The worse your problems are, the more you will have to pay. It's a pretty simple formula.  The exact numbers will vary but the general principal does not change. If an "A" paper borrower, with good income and perfect credit pays 7.5% interest with two points, then someone with a few credit problems can expect to pay at least 8.5% interest and someone with serious problems can pay as much as 14% or 15% interest and five to ten points. BACK TO CREDIT AND MORTGAGE ARTICLES PAGE CONTRACT WIZARD HOME PAGE TAX SALE RICHES HOME PAGE MORTGAGE MAGIC HOME PAGE