April 20th, 2016 5:27 PM by Gregg Mower
If you are about to embark into the Home Buying or the Refinancing process or have questions about the roles of a Direct Lender Verses a Mortgage Broker, I am sure this all is very confusing and you have many questions. Who will do my loan? What will it cost me? Who will be my Agent? What do I need to do to start this process? How can I make sure I get the best deal possible? You want to get all the information you can to make informed decisions, so you search the internet and talk with friends and family. Then you learn 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 will ask when they begin their home buying journey. Most Potential Home Buyers will call a Real Estate Agent first, as they want to buy a home, and that is the logical first step in their mind. In Reality, a home buyer should get hooked up with a Mortgage Broker or Direct Lender in the area they wish to purchase a home, I would recommend a Mortgage Broker for reasons we will discuss later in this article. Not only will a Mortgage Broker or a Direct Lender be able to pre-approve you for a home loan and give you a price in which you can buy, that Lender or Mortgage Broker can also get you to a Real Estate Agent that is proven in the market you are looking to buy in.
Ok, I just confused you with Mortgage Broker and Direct Lender. 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 and I hold both a License from the California Bureau of Real Estate (BRE) 00953953 and the National Mortgage Licensing System (NMLS) 2463961, which allows me to do both Real Estate Sales as well as a variety of different types of Loans, so the role of a Broker may vary in different states (Disclaimer Done). Back to Direct 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 Direct 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 different Direct Lenders and will have the ability to match the client’s needs to a Direct Lender’s specific guidelines in order to get the loan for the client the first time the client applies. When I say a Direct Lender controls their own funds, I mean that they will fund the loans they do from a line of credit they have established and may or may not service your loan (i.e. collect the monthly payments from you). A Direct Lender will ultimately put forth a set of rules to which they will lend by, and what they won’t lend by, which can make it extremely confusing to a potential home buyer to navigate on their own. A Mortgage Broker knows those little differences with the various different Direct Lenders and can deliver the loan to the right Direct Lender the first time without the frustration of going to multiple lenders before finding the right lender.
So those are some basic differences, now let’s take a look at the detailed differences, like costs, control, and professionalism. So 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 Direct 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 Direct 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 explanation 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. You might ask the question; what “Direct Lender” is best for me? The answer is; you don’t know, so you will probably rely on your Real Estate Agent (if you have found an Agent yet) or a friend. However, your Agent or friend may not know the differences between every Direct Lender’s guidelines, and may just be referring you to Loan Officer they have done business with in the past, not knowing what kind of company they work for. So how do you know what to do? The answer is to work with a professional Mortgage Broker who does know the differences between direct Lenders like MAE Capital Mortgage Inc. But will that cost me more money you ask? In fact, it should end up costing you less as a Mortgage Broker is limited, by law, on the amount of money they can make by arranging your loan to a maximum of 3% whereas a Direct Lender does not have any limitations on the amount of money they can make from funding your loan.
There have been more laws instituted in the last 8 years in the Mortgage Industry than there ever has in the history of lending leading up to that point. All these rules and laws were designed to help you, the consumer, and as with anything new, there are some flaws and some unintended problems and benefits that may help or hinder you in the process of getting a new loan. The mortgage crisis that hit in 2006 through 2011 was a result of Wall Street not being prudent with their practices with Mortgage Backed Securities and the coercion that Government played with Wall Street. As with most problems in our society, the Government felt it could do a better job of fixing the problem than could the Free Markets, thus, they created the Consumer Finance Protection Bureau (CFPB) to protect consumers from the lending industry, inevitably making it harder for a consumer to obtain a loan for a home. So Direct Lenders buckled down their lending guidelines and niched themselves in the market place, and by doing so made it even more difficult for an average consumer to know which Direct Lender would be best to fund their loan based on their individual financial situation. An unintended consequence of this is that Mortgage Brokers became more valuable for a consumer to use, in that it costs a Mortgage Broker less to originate a loan than a Direct Lender and Mortgage Brokers will generally get the consumer to the right lender the first time. However, those same laws made it so a Loan Officer working for a Direct Lender has the ability to make more money per transaction than a Loan Officer working for a Mortgage Broker. Since Loan Officers working for a Direct Lender have fewer licenses they have to maintain and they can make more money per transaction that has left the industry with far more Direct Lender Loan Officers than Mortgage Broker Loan Officers so consumers that do not know the difference will generally end up with the higher priced Direct Lender Loan Officers to do their Home Loans. Ironically, Loan Officers making more money per transaction will end up costing you, the consumer, more in interest rates and fees than a Mortgage Broker like MAE Capital Mortgage Inc.
Why will it cost me more money to use a Direct Lender than Mortgage Broker you ask? In order to answer that we need to look at the difference in costs between using a Direct Lender and a Mortgage Broker. First, we need to look at the makeup of both a Direct Lender and a Mortgage Broker. A Direct Lender is generally larger than a Mortgage Broker employing far more people than a Mortgage Broker, thus having a much larger overhead and a need to make more money than a Mortgage Broker. A Mortgage Broker, on the other hand, generally has far less overhead to worry about than a Direct Lender so they do not need to charge as much money per transaction as a Direct Lender would. A Mortgage Broker is also limited to the amount of fees they can charge, whereas a Direct Lender is not limited in the amount of Rates and Fees they can charge. With the Government limiting commissions and fees that a Mortgage Broker can make to 3% of the loan amount, and the fact that a Mortgage Broker has to disclose the total amount of money they make per transaction and a Direct Lender does not, inevitably, it will end up costing the consumer far less in Interest rate (lower monthly payments) and fees to use the Mortgage Broker. So let’s break down how a Direct Lender and a Mortgage Broker gets paid. The way a Direct Lender is paid is multi-fold and can be confusing. As we discussed earlier a Direct Lender is a company that controls the funds they lend and make their own set of rules and guidelines. The Direct Lender’s income can get extremely confusing, to keep it simple, a Direct Lender will make money when the loan closes from origination fees and Points, and they will make money when they sell your loan. They sell their loans to other Direct Lenders or to FNMA FHLMC, GNMA or a Wall Street Conduit, to keep it simple. The Direct Lender’s upfront Points and Fees are designed to pay for their Loan Officers, and operations, and when they sell the loan that money goes directly to the company. Whereas a Mortgage Broker need only to pay for their operations, which are significantly smaller than a Direct Lender, and those fees are limited to a maximum of 3% and some of us even charge less than that. In general, a Mortgage Broker’s fees will be at least 1% better than a Direct Lender and in some cases more than that. For Example; MAE Capital is a Mortgage Broker and we only charge 2.5%, that compared to a Direct Lender’s Interest Rates and Fees could be a savings of .5% in Interest rate (i.e. which would provide a lower monthly payment) and as much as 3% savings in upfront costs. Also, as a Mortgage Broker, we must disclose our fees to consumers whereas a Direct Lender does not have to disclose all the fees and where they are going to a consumer. In addition, a Mortgage Broker has to allow you to choose 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 and Lender Paid Fees. Oh, Mortgage Brokers 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.
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 provide these additional services as a Mortgage Broker must hold both a NMLS license and a BRE license, where a Direct Lender only needs to hold an NMLS license. A Mortgage Broker can bundle their services and further reduce their fees saving you thousands of dollars when a Mortgage Broker handles both the Real Estate transaction and the Loan. So concluding, you can do all the research to find who, how, and where to start the home buying process with, but my hopes are that this article brings some insight to you on areas where you can save money. At MAE Capital Real Estate and Loan we can assist you with the Home Loan and bundle that with allowing us to represent you as your Real Estate Agent and save you thousand in costs and fees. Call us today, we would love the opportunity to show you how we do this. You can also bring us the fee estimates sheets from other Direct Lenders you are dealing with right now and let us show you how we can beat their rates and fees. Whether you are buying a home, or refinancing your home, we can save you thousands, let us show you how call today and ask for one of our dual licensed Loan Officers (916) 672-6130. Or Click here and submit your information and or questions and we will contact you directly. We looking forward to talking with you!