Mortgage companies can be divided into two basic categories. They are either direct lenders or brokers. Banks like Bank America, mortgage banking firms like GMAC Mortgage, and portfolio lenders like Greentree are direct lenders. They not only originate (sell) mortgages to Wall Street, they fund each of the loans they originate using their own resources and then, more often than not, service them. The second category – brokers - originate loans on behalf of direct lenders. They neither fund nor service the loans they sell.
Why is this important?
Simply this - direct lenders and brokers are required to abide by an entirely different set of rules when it comes to disclosure. While brokers are obligated to disclose all the profits they will generate originating your mortgage, direct lenders are not. As a result, when you deal with a direct lender, you will never really know if the rate you receive is the lowest one available at a given cost because you have no way to verify that they delivered what they represented they would deliver.
Dealing with a broker, however, you will always know if you’re loan is over priced because the law requires brokers to disclose that it is being overpriced. As a result, the Good Faith Estimates he provides at application and closing provide you the means to verify that he is delivering your mortgage at the best available rate and at the lowest available cost. Broker generated Good Faith Estimates are like lie detector printouts and can be put to good use once you know how to interpret them.
Putting the disclosure aside for a moment, it’s worth mentioning that there are a couple of additional advantages to working with a broker you may not be aware of.
1. Most brokers have correspondent relationships with multiple lenders so they can frequently offer better rates than a single direct lender because they have access to the broader mortgage market. By contrast, when you deal with a direct lender the rates you see are offered on a take-it-or-leave-it basis because their marketing department only offers a single set of rates per product. What is more, the rates a direct lender offers on any given day may or may not reflect the competitive market.
2. There’s still another advantage to using a broker. More often than not you can often obtain a lower rate from a broker representing a direct lender than you will get dealing directly with the direct lender yourself. The reason is simple.
The direct lender doesn’t have any overhead to cover when a broker originates a loan. They don’t have to rent office space, buy and maintain office equipment, or have to carry the cost of loan officers and support staff. While they do have to have a staff underwriter, the borrower has to pay an underwriting fee to cover that expense. Lastly, when it comes to loan documents, the consumer pays for that as well. In the end, direct lenders frequently offer lower rates to their brokers because it doesn’t cost them anything to generate the business.
Now that you understand that direct lenders and brokers have to abide by a different set of disclosure requirements and that the broker offers a better selection of rates, it’s important you learn why it’s to your advantage to understand how you can use the broker’s disclosure requirement to control your loan costs and, thereby, control your mortgage interest rate.
