When deciding where to look for mortgage financing you can walk into a local bank, or as many people do, you might contact the bank where you do your personal banking. There is nothing wrong with doing that, but keep the following in mind:
* If you don’t qualify for a loan with the bank you have selected, you may still qualify through a different bank.
* If your bank does not have a loan program most suitable for your needs, it does not mean that another bank cannot help you.
* Your local bank may have a loan application fee of several hundred dollars, whether or not they can get your loan done. In today’s competitive lending environment, it is unnecessary to pay an application fee. For instance, I never charge an application fee, regardless of whether or not I can get your loan done.
* If you go through a mortgage broker/banker rather than directly to the bank, you actually may often get a better deal. Why is that? Wholesale vs. retail.
Mortgage brokerage companies, as a rule, have wholesale relationships with dozens of banks and “wholesale lenders”. A broker has access to wholesale rates that are often not available to the person that walks into the local bank. Why is that? I like to use an analogy from the auto industry to illustrate this point. General Motors, for example, would like to sell a car to anyone they can. However, we don’t all live in the Detroit area. Furthermore, even if we all lived in Michigan, G.M. could not handle the foot traffic if we were all to knock on the factory door. So G.M. and all auto makers have dealerships to help sell their products. The dealerships pay wholesale for the vehicles and sell them at retail, keeping the spread. The lending industry works similarly.
Banks cannot have a presence in every town and on every street corner. In fact, many wholesale lenders have no personal banking operations, and no brick-and-mortar locations that you can walk into. Nonetheless, if you fit their guidelines they want your business. So brokers have the wholesale relationships with the banks/lenders, and in turn, the broker retails the deal to the borrower. For borrowers, the advantage a broker/banker provides are: access to a wide variety of loan programs, flexible lending guidelines, and low interest rates (because the bank might wholesale to me and retail to you).
** As an example, allow me to tell you a quick story. I was working with a gentleman that was 79 years old and retired. He had income from a pension, social security, and annuities. He had plenty of assets and outstanding credit up around 800. He wanted a 15-year fixed rate and was going “full doc”.
This man could basically walk into any bank. And he did. I did not know that when I was working with him, but more power to him. He went directly to some banks to see what they were offering, and he also chose me to look around and see what I could do for him. As it turned out I took his loan to Chase Manhattan because in this particular scenario Chase enabled me to offer my prospective borrower the best combination of low rates and fees. On the morning that I was expecting this gentleman to come to my office to sign his loan documentation he called to ask me which lender I was going through. Of course, to have him call me at that stage of the process was disconcerting to me because it appeared that whereas up to that moment he was fully on board, now he was wavering. I asked if there was some sort of problem, and he replied honestly that he had been doing some shopping and that in addition to my helpfulness I had also shown him the best deal. He just wanted to know the lender so he could determine whether his local bank would be able to do better. I’ll tell you that I didn’t blame this man for his strategy and I appreciated his candor, but I was a bit disturbed that we were this far along into the process and he was still on the fence. Not wanting to waste time or tap dance, I just told him I was taking the loan to Chase Manhattan. He registered some surprise because he had gone to Chase directly and here I was offering him a better deal. At that point, he stopped looking around and we got his loan closed. Through me, the man got a better deal than going directly, and Chase compensated my firm. That’s wholesale vs. retail. Once again, this gentleman was an A+ borrower. So checking with a reputable broker or mortgage banker can’t hurt, even if you are speaking directly with a bank.
It is important to bear in mind that the lending relationships a loan representative (LR) has access to, or even the company that employs him/her, can have little to do with whether the individual is a good LR or a bad LR. In another article I distinguish between ethical and unethical loan representatives, and what a borrower should take into account before choosing an individual and company to work with. Also, as mentioned in another article, mortgage brokers are licensed, whereas loan officers, loan consultants, and loan originators (or, whatever the title) do not have to be licensed. While mortgage brokers can fall into the category of LR, LR’s can only be referred to as brokers if they are licensed.