A mortgage broker acts as a middle man by buying loans from lenders at wholesale and reselling them to bankers or borrowers, making money from a commission and mortgage broker fees. They are independent contractors who match borrowers with lenders. Bankers, on the other hand, lend their own money, earning a profit from servicing fees and interest. Most banks then package their mortgages in groups of $1 million and sell in the secondary market place, also earning a commission. They do this because a bank would rather not have its money tied up in low value investments (mortgage interest rates are @ 7%) when that money could be earning twice as much in stocks and mutual funds.
The best deals are with banks, and it is recommended that you go to the branch where you have your savings and checking accounts. With a bank, there are fewer fees to pay, and fewer middlemen earning a commission that must be paid for as well. Banks sell mortgages in volume, so they have a greater incentive to reduce costs to make a deal. The mortgage officer typically receives either a salary or an hourly rate, not a commission. So, the bank mortgage officer is less likely to find ways to raise the cost of the loan.
What is a mortgage broker? This is someone who is willing to handle more difficult loans than a bank is willing to deal with. If you have A credit, then you are better off going to a bank. Unfortunately, banks only deal with people with outstanding credit. This one requirement is what drives most people towards a mortgage broker vs bank mortgage officers.
So, if a bank repackages mortgages for resale, what is a mortgage broker going to do with the loan? Not much. Mortgage brokers merely set up the deals between the lender and the borrower, usually according to guidelines set by the lender. What is a mortgage broker making money off of? Fees! They make money off of their origination fees and closing costs, not from the interest that goes to the lender. Using a mortgage broker vs bank lenders only makes economic sense when the mortgage broker fees are less than what the lender would charge for offering the same service. This, fortunately for brokers, is typically the case.
If you have less than stellar credit, then your back is almost certainly not an option. To find the best mortgage broker, you need to shop around. Compare experience and fees, and ask for references. Get the fees in writing, and educate yourself about what the fees actually mean. The fees are where the broker makes money, and they are likely to be higher if they know that you are not shopping around with competing brokers.
Here are some other tips to consider when choosing a mortgage broker vs bank lender:
Your financial status will determine whether you can get a loan from a bank, or if you must resort to using a mortgage broker. Your best defense against being ripped off with mortgage broker fees is to educate yourself. The U.S Department of Housing and Urban Development and the US Federal Trade Commission are two great sources of information concerning mortgages.