The Difference Between Mortgage Brokers Versus Mortgage Bankers

by Gustan Cho

This Article Is About What Is The Difference Between Mortgage Brokers Versus Mortgage Bankers

What Is The Difference Between Mortgage Brokers Versus Mortgage Bankers is the question many borrowers often ask. Should borrowers go to a mortgage broker or a mortgage banker to qualify for a home mortgage. Is a loan officer from a mortgage banker more knowledgeable than a loan officer than a mortgage broker and/or vice versa? Where can I get a better mortgage rate and terms. From a mortgage banker or a mortgage broker?  We will explain the benefits of both mortgage brokers and mortgage bankers. There are times where borrowers can have more benefit from using a mortgage broker versus a mortgage banker and we will explain why. Many people are under the assumption using a mortgage broker is like using a middleman so mortgage rates are higher than using a mortgage banker. This is not true and we will explain why. Actually, it is the opposite. Normally, using a mortgage broker may yield a better rate for the borrower than a mortgage banker. We will go over the compensation structure of both mortgage brokers and mortgage bankers. Both mortgage brokers and mortgage bankers originate home mortgages. However, the way the operations and funding works is different.

Difference Between Mortgage Brokers Versus Mortgage Bankers On Home Loan Programs

What is the difference between mortgage brokers and mortgage bankers in home loan programs

Many borrowers do not know whether or not the loan officer who they are working with is a mortgage broker or mortgage banker. Both mortgage brokers and mortgage bankers are licensed professionals. Mortgage bankers and brokers have the same credentials. They both need to get take a 20-hour NMLS course, pass the 125 questions NMLS exam, and get licensed in states they want to originate loans. You cannot originate home loans in states you are not licensed in. From the mortgage loan applicant’s point of view, there is not much of a difference between a mortgage broker versus a mortgage banker. To a typical borrower, a licensed loan officer is a licensed loan officer. Members of the general public will contact a loan officer. A loan officer can work at a mortgage broker, mortgage banker, FDIC bank, or credit union. Loan officers who work as mortgage brokers and mortgage bankers need to be licensed as NMLS loan originators and in the states, they originate loans. Loan officers who work at FDIC banks and credit unions do not need to be licensed. They need to be registered with the NMLS. FDIC bank and credit union loan officers are exempt from state licensing. All of these companies can qualify borrowers, issue pre-approval, and originate and close home mortgages. Borrowers should take time and understand the difference among the different types of lenders. What type of lender can the borrower best benefit from.

How Do Mortgage Brokers Operate

Mortgage Brokers have relationships with wholesale lenders. Mortgage brokers need to apply and become approved by wholesale lenders who want to do business. Wholesale lenders are not licensed and cannot originate loans to consumers. Wholesale lenders need to become affiliated with retail mortgage brokers. Mortgage brokers can have as many wholesale lending partners as they want. Mortgage brokers have mortgage processors but do not have mortgage underwriters. Licensed loan officers originate loans for mortgage brokers. Once a loan officer submits a file to the mortgage broker, a mortgage processor gets assigned to the file. The mortgage processor will process the file by gathering all the documents required. The processor makes sure all paperwork is legible, there are no missing pages, all docs and paperwork is labeled, and gets it ready for submission to the wholesale lender.

Mortgage Underwriter For Mortgage Brokers

Once the file has been submitted to the wholesale lender, a mortgage underwriter is assigned to the file from the wholesale lender.  Once the underwriter has reviewed the file and finds the borrower meets all the guidelines, the mortgage underwriter will issue a conditional loan approval and send the file back to the mortgage processor. The mortgage processor and loan officer work together in gathering the conditions from the conditional loan approval. Once the conditions are gathered and complete, the file is resubmitted to the wholesale lender for a clear to close. The underwriter who issued the conditional loan approval is the mortgage underwriter who will review the conditions and issue the clear to close. Once the mortgage underwriter is satisfied that all the conditions from the conditional loan approval have been met, the underwriter will issue a clear to close.  A clear to close means the lender is ready to prepare the docs and fund the loan. The file is then sent back to the processor of the mortgage broker. The processor and the closing department of the wholesale lender will make arrangements with the title company as of the closing time and date. The closing department of the wholesale lender will prepare closing docs and send them to the title company. At closing, once all docs are signed by all parties, the closing statement is sent to the wholesale lender. Once the wholesale lender reviews the closing docs and everything seems in order, the wholesale will wire the funds. When money exchanges hands, the mortgage has closed.

Operations Of A Typical Mortgage Banker

What are the operations of a Typical Mortgage Banker?

Loan officers at mortgage bankers are no different than loan officers at mortgage brokers. Their job is to qualify borrowers by taking a mortgage loan application, running a tri-merger credit report, collecting documents, and running the automated underwriting system for automated approval. However, mortgage bankers originate and close loans under their company name because they use their own funds. All mortgage bankers use their warehouse line of credit to fund the loans they close. After they fund the loan, mortgage bankers sell the loan they just funded on the secondary market. Normally, they sell the loan they just closed after funding to a larger mortgage banker. That larger mortgage banker is normally the wholesale lender the mortgage banker has relationships with. Mortgage bankers have wholesale lender relationships like mortgage brokers. However, the difference between mortgage bankers versus mortgage brokers is mortgage bankers have a correspondent relationship with wholesale lenders.

What Is Correspondent Lending

What is a correspondent lending relationship?

A correspondent lender is when a mortgage banker sells the loan they close and fund on the secondary mortgage market to a larger mortgage banker. The mortgage banker that sells the loan they funded to a larger mortgage banker is called the correspondent lender. Mortgage bankers can have their own underwriting staff if they do delegate underwriting. What delegated underwriting means is the mortgage banker’s in-house underwriter will underwrite the file and follow the guidelines of the wholesale lender they plan on selling the loan after it funds. Non-delegated underwriting means when the mortgage banker has a mortgage underwriter of the wholesale lender underwrite the loan. Mortgage bankers have their own underwriters, support and operations personnel, secondary and lock desk, closing department, in-house funding department. Mortgage brokers do not have their own underwriting team or operations team. Mortgage brokers work together with the operations and support team of the wholesale lender from application until closing.

How Do Mortgage Bankers Get Paid Versus Mortgage Brokers

Shopping for the best mortgage rates can save you tens of thousands of dollars over the term of a 30-year fixed-rate mortgage. Mortgage rates can vary from lender to lender. In this paragraph, we will explain why some lenders have higher rates than others. Both mortgage bankers and mortgage brokers are loan originators. The maximum a mortgage broker company can make on a transaction is 2.75% compensation. Out of the 2.75% yield spread premium paid by the wholesale lender, the mortgage broker-owner needs to pay the loan officer, the support and processing staff, rent, and other office overhead. 2.75% is not much money to cover a mortgage broker company with higher expenses such as licensing and bonding costs to get licensed in multiple states. Mortgage broker yield spread premium needs to be disclosed on the Closing Disclosure since mortgage brokers do not close the loan under their name. Mortgage bankers do not have to disclose how much they make on the Closing Disclosure. This is because mortgage bankers close the loan under their name and fund the loan. Mortgage bankers are not capped on how much they make. Mortgage bankers can make as much as they want. However, the more the back-end compensation is, the higher the mortgage rates. This is why mortgage brokers often have lower rates than mortgage bankers.

Mortgage Rates And Costs Of Mortgage Brokers Versus Mortgage Bankers

What are the mortgage rates and the costs of mortgage brokers compared to mortgage bankers

Mortgage rates vary from lender to lender. Every mortgage company (whether a mortgage banker or mortgage broker) gets raw pricing on rates. Raw pricing is the same for everyone. However, mortgage companies need to make a profit to pay their loan officers and expenses. This is how mortgage rates to consumers work. There is no free lunch in the mortgage industry. The reason why mortgage rates differ from lender to lender is dependent on how much the mortgage company charges on the back end.

Mortgage Rates Versus Lender Compensation

The more a mortgage company makes, the higher the rate. Mortgage bankers can make as much as they want because they close the loan under their names and fund their own loans. So if a mortgage banker wants to make 10% of the loan amount on each deal, they can and it is perfectly legal. However, the rates they charge consumers will be priced out of the market. Mortgage brokers are capped on how much compensation they can make. The maximum mortgage brokers can make is a 2.75% yield spread premium. In general, mortgage brokers have lower mortgage rates versus mortgage bankers. Most mortgage bankers’ compensation is substantially higher than 2.75%. Some mortgage brokers offer a discount rate division where the rates are substantially low. This is done by mortgage brokers lowering their comp plan to 1.25% or lower with the wholesale lender. Remember, the lower the comp plan the lower the rates to consumers. Mortgage bankers can do the same. Mortgage bankers can offer discount rates by lowering their back-end comp plan. This is why it is wise to shop for mortgage rates and try to get the best rates. This holds especially true for prime borrowers. Lenders, whether they are mortgage bankers or mortgage brokers, can negotiate rates and fees.

15 comments

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15 comments

Elizabeth Cooper November 26, 2020 - 11:54 pm

I read through the pre-qualification process and would like to know if we can do this. I am looking to get a mortgage to buy a house, I was thinking around December. My current lease is up in June and I am unsure if this is a good timeframe or if I should allow more time. I also want to know if I can qualify or not.

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Sue Schmitt November 26, 2020 - 11:57 pm

I have a 12 month old BK Ch 7 and based on extenuating circumstances there is a clause in FHA that allows someone who lost a job due to no fault of their own to qualify for purchase if they saw a 20% drop in income from the job loss and have proven management of credit since. I now have a 650 score and excellent DTI with a job of 4 years in an industry I have worked for over 17 years. My income and debts are stable and the only reason for the BK was divorce and job loss anyway. Home valued at 280k and we have a purchase option contract at 169,900 right now. The LTV is very excellent as well and likely we wont even need MI

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Lena Hoffman November 26, 2020 - 11:58 pm

I have several judgments that have been dormant for 8-10 years. Recently, one of the creditors started pursuing repayment very aggressively. The total owed is about $50,000. My home is valued at 510,000, and my current mortgage is $192,000. My credit is excellent in the 790 – 810 range. I am looking to resolve the outstanding judgments through a refinance of my primary mortgage and cash out enough to satisfy the judgments.

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Gunner Cho November 27, 2020 - 12:00 am

I’m currently in a chapter 13. The 13 is not in accordance with my current mortgage. The 13 is in all personal loans when I went through a divorce. I have two years left and wanted to sell my home to pay off my 13 but buy another home.

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R. Smith November 27, 2020 - 12:05 am

I just got hired by the Tennessee State Police as a probationary trooper. I will be starting the state police training academy on January 15th, 2021. I have passed all the written, psychological, oral, background, and physical exams. I have an offer employment letter. I live in Chicago and am planning on relocating there within the next few weeks. Can I qualify for a mortgage? I have a history in law enforcement. I worked for the Chicago Police Department in the 17th District: Albany Park for 10 years I need to get my family out of Chicago with all the craziness with the incompetent Mayor and our incompetent obese fat governor JB Pritzker with their defunding the police and incompetence. Looking for a W2 only mortgage… actively looking for a home…. Knoxville TN area

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Correspondent Lending Versus Wholesale Lending By Mortgage Brokers November 27, 2020 - 2:12 am

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Penny MacAulliffe December 1, 2020 - 3:13 pm

I run my business out of my home. I’m reacting a home and I’m outgrowing it. My business is picking up and I need more space to live and work.

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Tiffany Werlend December 2, 2020 - 4:13 pm

I always thought it was the other way around where mortgage brokers had higher mortgage rates since they were the middle man and mortgage bankers were the real deal. However, after reading this blog, it makes all the sense in the world. Regardless, I think it is best to shop for mortgage rates and see what the differences are between lenders. Thank you for such a informative blog on this topic matter. Would have never known and I bet these mortgage bankers would have never told me either.

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Tammy Trainor December 23, 2020 - 7:37 pm

Team,

Please let me know if you want me to sign up for this…….
HAVE NORTHWEST FILE YOUR COMPLIANCE FILING EACH YEAR
Each state has reporting requirements for LLCs and corporations to keep a company active and in good standing with the state. These are due on a regular basis (usually once per year or every other year). If you hire us for annual compliance service, you never have to worry about these. We’ll file them on your company’s behalf when they’re due.

Compliance Service Benefits:

You can relax knowing a professional filed these required compliance reports for you.
This will help protect your privacy. Whatever report we file with the state will list our contact information instead of yours. We will include only the information the state requires. Plus, the state will see and record our IP address instead of yours—minimizing the connection between your cell phone, home computers, and office computers—further enhancing your privacy.
How This Service Works:
We charge no initial fees to enroll in this service. Then, ninety (90) days before your business’s compliance filing is due, we will send you an online notification of the upcoming deadline. Five days later, we will automatically file your business’s compliance report and charge your card the required state fees (these vary by state) plus $100 for our compliance filing service. If you ever decide you want to cancel this automatic compliance filing service, you can do so in your online account at any time.

Note: Depending on the state where you form or register your business, the report may be called an Annual Report, Annual Statement, Statement of Information, Periodic Report, Biennial Statement, Decennial Report, Franchise Tax Report, etc.
Thank you,
Tammy Trainor
Chief Operating Officer
Gustan Cho Associates

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Gustan Cho December 25, 2020 - 9:07 pm

Tammy, I just emailed you my username and password. I think it is best that you do this for me so there is no confusion in getting this done right the first time around.

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Piotr Bieda December 23, 2020 - 7:38 pm

If it’s $100 per state I would go for it, I see the different states have different dates, or just do California manually now, and when we get more states just opt-in for this so we don’t miss deadlines

Piotr Bieda
Chief Technology Officer
Gustan Cho Associates

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Gustan Cho December 25, 2020 - 9:06 pm

Piotr, it is an annual fee. The dates do not matter.

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Tammy Trainor December 23, 2020 - 7:38 pm

Ok. I added me as being able to make changes and all that kind of crap….. The only thing left is for me to attest for each of you and then see if anything pops up as needing to be fixed and then pay fee. At that point I think I move onto the little things Florida might want.

ill keep you posted!

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Gustan Cho December 25, 2020 - 9:05 pm

Sounds great Tammy. I would appreciate that.

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Tom Cooper December 23, 2020 - 7:40 pm

i am a veteran first time home buying I have my C O E from the V A I am having a hard time getting a loan

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