What’s the Difference Between a Broker and a Banker?
A mortgage banker works directly for one bank and only has that banks lending programs and products to work with. An example would be applying for a mortgage at your national chain bank. Whatever ever the loan type VA, FHA or conventional the bank has their guidelines set. They except a minimum credit score, minimum debt ratio percentage etc. If the borrower doesn’t have the minimum score there is no other alternative. Banks also have “overlays” on guidelines set by Fannie Mae & Freddie Mac which make their product offering restricted. Bankers typically get paid a salary and a small commission/bonus on the number of loans they close.
A mortgage broker has several banks and lenders to fund loans. They can shop loan programs and compare rates in the wholesale marketplace to offer the borrower the best deal for the borrower they can find. Lenders have restrictions as well, but all lender have different restrictions for loans they will accept. The broker will also have access to loan programs the bank don’t have. If a borrower had a recent credit event like a foreclosure or a bankruptcy typically the bank can’t help at all. The broker would have access to lenders that don’t have restrictions on these events. Mortgage Brokers don’t get paid a salary and are only compensated when the loan closes.
The Best Explanation is an Example
Hypothetically, let’s say we have a borrower applying for an FHA loan and they have a credit score of 580. FHA doesn’t have a restriction on credit score, as a matter of fact FHA doesn’t require a score at all. If the bank or lender has a minimum score that is called an “overlay”. An overlay is a rule over and above the FHA guidelines that govern who the bank or lender will led money too. Most traditional banks have an overlay of a 620 minimum score for an FHA loan. This borrower would get declined at the bank.
The borrower then applies for an FHA loan with a mortgage broker, the broker has numerous lenders that fund FHA loans. Some of the lenders may have the 620 overlay, some may require 580 and some may underwrite the loan based on the actual FHA guidelines approving borrowers with no score. In this case the broker would be able to shop the rates and terms of the loan with the lenders that will accept a 580 score for FHA. Then the broker would present the options to the borrower and they would decide which lender to place the loan with. The broker has more flexibility when it comes to placing and pricing loans.
I’m not stating that mortgage brokers are better, I’m stating that brokers have flexibility with products and programs, numerous lenders to place loans with and they can provide alternative options that most banks can’t.
- The best mortgage is the one with the lower rate.
- The lender that says they will pay your closing costs.
- I have a relationship with my bank so I can get a better deal.
- My bank will fund the loan and service the loan, they won’t sell it.
- You need 20% down to buy a home.
- I need cash for closing costs.
- My credit is bad so I can’t buy.
- I am too old to get a mortgage.