Blog with MAE Capital

Direct Lender V. Mortgage Broker

February 18th, 2015 5:09 PM by Gregg Mower

As a consumer I am sure you are confused about a lot of things when you start your hunt for a home.  Who will be my Agent, who will do my loan, what will it cost me, what do I need to start this process?  You want to get all the information you can to make informed decisions, so you search the internet and talk with friends.  Then someone tells you that you have to be Pre-Approved for a home loan prior to looking for a home, and where do I go to get this done?  All these questions are what the typical home buyer starts off with.  Believe it or not finding a Real Estate Agent is probably not your first step.  You should get hooked up with a Lender or a Mortgage Broker in the area you wish to purchase a home.  Not only will that Lender or Mortgage Broker be able to pre-approve you for your home loan and give you a price in which you can buy, that Lender or Mortgage Broker can get you to an Agent that is proven in the market you are looking to buy in. so your transaction goes smoothly.

Ok, I just confused you with Lender and Mortgage Broker.  What is the difference, you say; I think I need a Lender, didn’t you just say that I should start with being pre-approved?  I did say that, so let me un-confuse you with the differences between a direct lender and a Mortgage Broker. First a disclaimer; I am writing this article in California and I am very familiar with the laws of the state as I have been working in the state for the last 30+ years, this may vary within different states (disclaimer done).  Back to Lender Mortgage Broker differences.  A lender is traditionally the one who will have control over the funds they are will be offering to the public to lend.  A lender will have its own set of rules on which they will lend money, and those rules will differ from lender to lender.  A Mortgage Broker on the other hand can work with many lenders and will have the ability to match the client’s needs to the lender’s guidelines. 

So that is the basic differences, now let’s take a look at the detailed differences, like what are the cost differences to me.  So a direct lenders control how and who they fund loans to based on a set of guidelines they produce.  These guidelines are set forth by the management of the lender to accomplish their own goals.  These guidelines include what minimum Credit Scores will be acceptable to lend on, what loan to value ratios are acceptable, what income documentation is needed, how to verify funds to close, how to view tax returns, how to view rental properties, and a bunch of other criteria that goes into their guidelines.  Each lender has a person or people to interpret these guidelines and they are called underwriters.  The underwriter’s job is to evaluate the risk of lending money to you, and if they can then sell your loan to another lender to make money.  That is a really basic idea of what a direct lender does, and it can get a whole lot more detailed, but that is not for this article today.

Now we know that every lender is different and has a different set of “guidelines” of which to evaluate you with.  So how would you know as a regular consumer what “Lender” is best for you?  The answer is you don’t know, and you will probably rely on your Real Estate Agent (if you have found an Agent first) or a friend to refer you to a Lender or Mortgage Broker.  However, your Agent or friend may not know the differences between lender’s guidelines, and may just be referring you to Loan Officer they have done business with in the past.    So how do you know what to do?  The answer is to work with a professional Mortgage Broker who does know the differences between lenders.  But will that cost me more money you ask?  I heard Mortgage Brokers caused the mortgage crisis?  These are great questions that have already been taken care of for you by your elected officials in 2010.

 

There have been more laws instituted in the last 7 years in the Mortgage Industry than there ever has history of lending leading up to that point.  All these rules were designed to help you, the consumer, and as with anything new there are some flaws and some un-intended benefits that you may not have herd of.  The mortgage crisis that hit in 2006 through 2011 was a result of Wall Street not being prudent with their practices of selling mortgage products.  What has resulted is interesting, and should be looked at seriously from a consumer.  When you follow the money you will see who has benefited here, and what you need to know to save money.  First; the new laws required all Loan Officers be licensed under the National Mortgage Licensing System NMLS.  Next, the laws set limits on how loan officers are compensated working for a Mortgage Broker and a Direct Lender.  The laws further define how the consumer has to be disclosed to with regards to the fees in a transaction.  The devil is in the details and that unless you have read the new laws like I have, several times, you would not know how these rules have hurt and helped the consumer.  I said follow the money earlier, so you need to ask yourself why do most loan officers work for a Direct Lender and not a Mortgage Broker.  That’s right money, they can make more money without disclosing it, and in doing so you end up paying more for your transaction. 

So we need to look at the difference in costs between using a direct lender and a Mortgage Broker.  In order to do so we need to look at the makeup of both a direct lender and a Mortgage Broker.  A Direct lender is general pretty big with a big appetite for closing loans and making fees from the loans, as they have far more people that they need to employ to make their process happen.   A Mortgage Broker, on the other hand, generally has far less overhead to worry about.  A Mortgage Broker is also limited on the amount of fees they can charge whereas a direct lender is not limited.  That’s right the Government has limited commissions and fees that a Mortgage Broker can make to 3% of the loan amount, which is the law.  The direct lender does not have this limitation and can make as much as they deem necessary to feed their operation and put money into the Loan Officer’s pockets.  So let’s break down how a lender and a Mortgage Broker get paid. 

The way a Lender will be paid is multi fold and can be confusing, but if you follow the money you will see where your benefits can be as an informed consumer.  As we discussed earlier a Direct Lender is a company that controls the funds they lend and makes their own set of lending guidelines.  The direct lender’s income is where it gets confusing.  A lender will receive a set of interest rates called correspondent rates, or set rates based on selling Mortgage Backed Securities.   They will then set a interest rate and fee structure to where they can be profitable at a certain volume of closed and sold loans,  this “base” rate or “Wholesale Rate” is set before a branch or Loan Officer is paid.  A Lender will have two sides of their company; the operations side where loans are underwritten, Docs are drawn, and Loans are sold; and the origination side where loans are originated processed and submitted to the operations side.  A lender’s origination side is where you will see the most differences in costs to the consumer.  A branch or an origination side of a lender will have a branch manager, and a processing staff at a bare minimum, some employ more folks that have different jobs such as disclosing, quality control, and document delivery and such.  They also have their NMLS licensed Loan Originators that are paid a commission on every loan they close.  So we have determined there are a few folks that need to be paid with a direct lender, and we have not even considered the nice offices they have the rent it takes to maintain them.  That being said let’s get down to dollar and cents.

I felt it necessary to describe to you what lender is made up of before telling you how loans are priced to you the consumer.  We know that a direct lender has considerable overhead that they must maintain, and it all takes dollars to do so.  We have established that a lender will set a Base or Wholesale rate and price to pay for their operations, what we need to discuss is how their origination side is paid.  Remember that a direct lender is not bound by the same rules as a Mortgage Broker with regards to the amount of money that can be made on their behalf.  So what are the costs you ask?  Answer, a typical direct lender will add at least 1 point (could be more) to run the branch and pay origination staff other than the Loan Officers.  They will also collect a fee up to $1,200 per transaction called an admin fee, underwritings fees or something of that nature, in addition they will typically collect a processing fee which could be $600-$1,000 on top of the admin fees.  Then the loan officer commission is based on points (or percent of the loan amount) that have to be added in as well, and can be in excess of 2-3%, they can also charge an origination fee of 1% on top of that.   So the fees from a direct lender can be upwards of 4-5% over the wholesale price.  Oh, and a direct lender does not have to disclose this to you,  as they have been able to hide behind the laws that their government lobby carved out for them when the new rules went into effect in 2010.

Remember, one of the new laws that came from the Dodd Frank Act.  (That is the name of the new laws implemented in 2010) is that a mortgage broker’s total fees are capped at 3% by law.  So looking at the breakdown of a mortgage broker’s fees you can see right out of the gate they are at least 1% better and in some cases a whole lot more than that.  For Example; MAE Capital Real Estate and Loan is a Mortgage Broker and we only charge 2.5% above wholesale rates and that could be a 2.5% saving to you.   This could buy you a .5% difference in interest rate.   Also, as a Broker, we must disclose our fees to you, the consumer.  In addition, we have to allow you chose whether you would like to pay for origination fees out of pocket or have the rebate from the lender pay for your fees, called borrower paid fees verses lender paid fees.     Oh, as a Broker, we must also show you 3 or more alternative lenders we could deliver your loan to, a direct lender does not have to do any of this. 

I might be shunned by writing this article, but I believe this information is extremely important so you understand the differences between a direct lender and a Mortgage Broker.  We have learned that direct lenders and their lobby had a direct line in the making of the new laws (Dodd Frank) that exclude them from many of the laws and rules a Mortgage Broker must adhere to in consumer protection.  We as a Mortgage Broker must also hold a California Real Estate license in order to Broker loans as well as the NMLS license.  This makes the Mortgage Broker supremely more qualified to offer a variety of different loan products that are specifically designed for your specific needs at a better price.  A Mortgage Broker will be able to deliver better interest rates at lower fees and costs than a direct lender, a fact that until now, has not been fully disclosed to consumers.     Following the money you will also see why a Mortgage Broker has become more difficult to find than in years past, it seems most loan officers have determined they can make more money working for the direct lender.  Again, more money a Loan Officer makes the worse the interest rate the consumer receives. 

A Mortgage Broker can also help you with Real Estate functions such as Real Estate Sales, Private Money, and other mortgage products the direct lender cannot.  The further bundling of services a Mortgage Broker can offer can end up saving you thousands of dollars when looking to purchase and sell real estate.  You had no idea that this single article could end up saving you thousands of dollars.  Your research has paid off you found the secret that Direct Lender and Independent Real Estate Agents will not tell you.  We look forward to helping you with your mortgage and Real Estate needs.

 

 

As a consumer I am sure you are confused about a lot of things when you start your hunt for a home.  Who will be my Agent, who will do my loan, what will it cost me, what do I need to start this process?  You want to get all the information you can to make informed decisions, so you search the internet and talk with friends.  Then someone tells you that you have to be Pre-Approved for a home loan prior to looking for a home, and where do I go to get this done?  All these questions are what the typical home buyer starts off with.  Believe it or not, finding a Real Estate Agent is probably not your first step.  You should get hooked up with a Lender or preferably a Mortgage Broker in the area you wish to purchase a home.  Not only will that Lender or Mortgage Broker be able to pre-approve you for your home loan and give you a price in which you can buy, that Lender or Mortgage Broker can get you to an Agent that is proven in the market you are looking to buy in. so your transaction goes smoothly.

Ok, I just confused you with Lender and Mortgage Broker.  What is the difference, didn’t you just say that I should start with being pre-approved?  I did say that, so let me un-confuse you with the differences between a direct lender and a Mortgage Broker. First a disclaimer; I am writing this article in California and I am a licensed Real Estate Broker (00953953) and NMLS (246961) and I have been working in the state for the last 30+ years, and this information may vary within different states (disclaimer done).  Back to Lender and Mortgage Broker differences.  A direct lender is traditionally the one who will have control over the funds they are will be offering to the public to lend.  A lender will have its own set of rules on which they will lend money, and those rules will differ from lender to lender.  A Mortgage Broker on the other hand can work with many lenders and will have the ability to match the client’s needs to the lender’s guidelines. 

So that is the basic differences, now let’s take a look at the detailed differences, like what are the cost differences to you.  A direct lender control how and who they fund loans to based on a set of guidelines they produce.  These guidelines are set forth by the management of the lender to accomplish their own goals.  These guidelines include what minimum Credit Scores they will lend on, what loan to value ratios are acceptable, what income documentation is needed, how to verify funds to close, how to view tax returns, how to view rental properties, and a bunch of other criteria that goes into their guidelines.  Each lender has a person or people to interpret these guidelines and they are called underwriters.  The underwriter’s job is to evaluate the risk of lending money to you, and if they can then sell your loan to another lender to make money.  That is a really basic idea of what a direct lender does, and it can get a whole lot more detailed, but that is not for this article today.

Now we know that every direct lender is different and has a different set of “guidelines” of which to evaluate you with.  So how would you know, as a regular consumer, what “Lender” is best for you?  The answer is you don’t know, and you will probably rely on a friend or a Real Estate Agent However, your Agent or friend may not know the differences between lender’s guidelines, and may just be referring you to Loan Officer they have done business with in the past.    So how do you know what to do?  The answer is to work with a professional Mortgage Broker who does know the differences between lenders.  But will that cost me more money you ask?   These are great questions that have already been taken care of for you by your elected officials in 2010 with the enforcement of the Dodd Frank Act..

There have been more laws instituted in the last 7 years in the Mortgage Industry than there ever has in the history lending leading up to that point.  All these rules are designed to help you, the consumer, and as with anything new there are some flaws and some un-intended benefits that you may not have heard of.  When you follow the money you will see who has benefited here, and what you need to know to save money.  First; the new laws required all Loan Officers be licensed under the National Mortgage Licensing System NMLS.  Next, the laws set limits on how loan officers are compensated working for a Mortgage Broker and a Direct Lender.  The laws further define how the consumer has to be disclosed to with regards to the fees in a transaction.  The devil is in the details and unless you have read the new laws like I have, several times, you would not know how these rules have hurt and helped the consumer.  I said follow the money earlier, so you need to ask yourself why do most loan officers work for a Direct Lender and not a Mortgage Broker.  That’s right money, they can make more money without disclosing it, and in doing so you end up paying more for your transaction. 

So we need to look at the difference in costs between using a direct lender and a Mortgage Broker to do your home loan.  In order to do so we need to look at the makeup of both a direct lender and a Mortgage Broker.  A Direct lender is general pretty big with a big appetite for closing loans and making fees from the loans, as they have far more people that they need to employ to make their process happen.   A Mortgage Broker, on the other hand, generally has far less overhead to worry about.  A Mortgage Broker is also limited on the amount of fees they can charge whereas a direct lender is not limited.  That’s right the Government has limited commissions and fees that a Mortgage Broker can make to 3% of the loan amount, which is the law.  The direct lender does not have this limitation and can make as much as they deem necessary to feed their operation and put money into the Loan Officer’s pockets.  So let’s break down how a lender and a Mortgage Broker get paid. 

The way a direct lender will be paid is multi fold and can be confusing.  So let’s start where the direct lender get their interest rates.   A direct lender will receive interest rates called correspondent rates from other direct lenders, or they set rates based on selling Mortgage Backed Securities.  This is considered their cost.  They will then add to their cost rates their “spread”, or profit margin, to where they can be profitable, this is the direct lender’s “base” rate or “Wholesale Rate” .  A Lender will have two sides of their company; the operations side, where loans are underwritten, Docs are drawn, and Loans are sold; and the origination side where loans are originated processed and submitted to the operations side.  A lender’s origination side is where you will see the most differences in costs to the consumer.  A branch or an origination side of a lender will have a branch manager, and a processing staff at a bare minimum, some employ more folks that have different jobs such as disclosing, quality control, and document delivery and such.  They also have their NMLS licensed Loan Officers that are paid a commission on every loan they close.  That being said let’s get down to dollar and cents.

I felt it necessary to describe what lender is made up of before telling you how loans are priced to you, the consumer.  We know that a direct lender has considerable overhead that they must maintain, and it all takes dollars to do so.  We have established that a lender will set a Base or Wholesale rate and price to pay for their operations, what we need to discuss is how their origination side is paid.  Remember that a direct lender is not bound by the same rules as a Mortgage Broker with regards to the amount of money that can be made on their behalf.  So what are the costs you ask?  Answer, a typical direct lender will add at least 1 point (could be more) to run the branch and pay origination staff other than the Loan Officers.  They will also collect a fee up to $1,200 per transaction called an admin fee, underwritings fees or something of that nature, in addition they will typically collect a processing fee which could be $600-$1,000 on top of the admin fees.  Then the loan officer commission is based on points (or percent of the loan amount) that have to be added in as well, and can be in excess of 2-3%, they can also charge an origination fee of 1% on top of that.   So the fees from a direct lender can be upwards of 4-5% over the wholesale price.  Oh, and a direct lender does not have to disclose this to you,  as they have been able to hide behind the laws that their government lobby carved out for them when the new rules went into effect in 2010.

Remember, one of the new laws that came from the Dodd Frank Act.  (That is the name of the new laws implemented in 2010) is that a mortgage broker’s total fees are capped at 3% by law.  So looking at the breakdown of a mortgage broker’s fees you can see right out of the gate they are at least 1% better and in some cases a whole lot more than that.  For Example; MAE Capital Real Estate and Loan is a Mortgage Broker and we only charge 2.5% above wholesale rates and that could be a 2.5% saving to you or $7,500 on a $300,000 loan.   This could buy you a .5% difference in interest rate.   Also, as a Broker, we must disclose our fees to you, the consumer, where the direct lender does not.  In addition, a Mortgage Broker has to allow you chose whether you would like to pay for origination fees out of pocket or have the rebate from the lender pay for your fees, called borrower paid fees verses lender paid fees.     Oh, a Mortgage Broker must also show you 3 or more alternative lenders they could deliver your loan to, a direct lender does not have to do any of this. 

I might be shunned by writing this article, but I believe this information is extremely important so you understand the differences between a direct lender and a Mortgage Broker.  We have learned that direct lenders and their lobby had a direct line in the making of the new laws (Dodd Frank) that exclude them from many of the laws and rules a Mortgage Broker must adhere to in consumer protection.  A Mortgage Broker (in California) must also hold a California Real Estate license in order to Broker loans as well as the NMLS license.  This makes the Mortgage Broker supremely more qualified to offer a variety of different loan products that are specifically designed for your specific needs at a better price.  A Mortgage Broker will be able to deliver better interest rates at lower fees and costs than a direct lender.     Following the money you will also see why a Mortgage Broker has become more difficult to find than in years past, it seems most loan officers have determined they can make more money working for the direct lender.  Again, more money a Loan Officer makes the worse the interest rate the consumer receives and that is you. 

A Mortgage Broker can also help you with Real Estate functions such as Real Estate Sales, Private Money, and other mortgage products the direct lender cannot.  The further bundling of services a Mortgage Broker can offer can end up saving you thousands of dollars when looking to purchase and sell real estate.  You had no idea that this single article could end up saving you thousands of dollars.  Your research has paid off you found the secret that Direct Lenders and Independent Real Estate Agents will not tell you.  We look forward to helping you with your mortgage and Real Estate needs. 

 


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