Banker, Direct Lender, Credit Union, Mortgage Broker, and More
|The order of purchasing real estate (in my experience) should be:
1) Knowing what you can afford
2) Being pre-qualified for funding (if needed)
3) Deciding on a location
4) Finding a property to buy
Not everyone follows this process; working in any other order can delay if not derail a purchase.
Let’s focus on the funding part of this process. As with many things in this country there are multiple choices when it comes to funding. Between mortgage lenders, banks, and credit unions the options are many. The things to compare are rates, terms and overall service.
In the Professional Real Estate Investor Class, we talk about the benefits of all these lending sources, but for the purpose of this article I’m going to focus on the advantages of using a mortgage broker.
The definition of a mortgage broker is: An intermediary who brings mortgage borrowers and mortgage lenders together, but does not use its own funds to originate mortgages. A mortgage broker gathers paperwork from a borrower and passes that paperwork along to a mortgage lender for underwriting and approval. The mortgage funds are then lent in the name of the mortgage lender. A mortgage broker collects an origination fee and/or a yield spread premium from the lender as compensation for its services. (Investopedia)
Here are some of the benefits you can find with a broker according to the NAMB (National Association of Mortgage Brokers).
Brokers don’t originate the mortgage, but they have many sources for funding which give them more options than just the single in-house loans. This can be a positive thing because they often get special rates from lenders that they have relationships with. Some brokers have access to loans with wholesale pricing that as an individual borrower, you could not access.
Because the broker is the person “shopping” the loan it saves you time from calling and doing all the researching. A broker can also help evaluate the terms of each lender, helping you avoid the loans that have confusing payment terms and hidden fees.
By law (all of which have become more strict since 2008), fees and terms of a contract with a mortgage broker must be completely transparent. There has to be full disclosure of the rate which the broker will receive for writing the loan. Many of these rules are according to the Consumer Financial Protection Bureau and its new mortgage reform rules that went into effect January 2013.
Using a mortgage broker can simplify the process and can offer advice you might not get by using a direct lender. According to Don Formmeyer (President NAMB) “Brokers look to build a relationship with their clients and offer assistance where it is needed. Whether it is helping with a basic understanding of credit or action as a helping hand throughout the entire mortgage process, brokers tend to be more helpful than the banks.”
Personally I’ve always liked working with a mortgage broker because they advocate for me. Being “self-employed” for over 25 years has always made getting loans more challenging, but a mortgage broker knows which lenders will be more inclined to work with me.
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