Mortgage Brokers are Fighting Back with Lower Rates, Less Fees, and More Options for Consumers
Mortgage Brokers across the Nation are joining forces to educate consumers and Real Estate professionals about the many benefits of working with an independent mortgage expert.
Things are changing, and here’s why:
- Mortgage Brokers Push Back
- What are My Options?
- More Expensive is Not Better
- The Cost of Your Interest Rate
- Mortgage Broker Success Story
- Experience Counts More Than Anything Else
- Buyer Be Aware
- Working with Professionals
Mortgage Brokers Push Back
For many years, mortgage brokers have been delivering a five star service experience and the professional expertise that you would expect from a small business owner.
Independent mortgage experts often see themselves more as a trusted advisor with your long term wealth and security as the foundation of your business, and personal relationship.
You build relationships with trusted advisors when it’s important enough to seek professional guidance. I would strongly argue that what is probably the largest investment you will make in your lifetime is one of those things that would benefit from professional advice.
Somehow, things got turned upside down. Big online lenders now spend hundreds of millions of dollars to convince you to fill out a form or make a phone call to an hourly support staff member with likely limited time in the industry.
It’s not the same experience as working with an expert. And it’s definitely not what was promised on the TV commercial that is paid for by its customers.
The biggest challenge that most mortgage brokers have is competing against this type of fuzzy message carpet bombing that only they can afford to do. The truth is, most people would like the loan application process to be easier, and it’s worth “giving it a shot” based on that fact alone. I get this, it makes sense.
Sometimes it goes well, and sometimes it goes bad…really, bad.
New industry leaders are breathing life into what was previously a wide spread industry of experienced individuals. Behind the leadership of Anthony Casa, and the Association of Independent Mortgage Experts (AIME), tens of thousands of broker members are being empowered with a single voice.
AIME members also have access to ARIVE, a next generation technology that gives consumers the automation and convenience they want, in the hands of an expert that can help.
This technology is also being called “broker in a box”, which would allow competent loan officers to easily move from an expensive direct lender business model, to an independent mortgage broker.
A similar technology is being offered by wholesale lender UWM. This is an example of a powerful industry player putting their money where their mouth is.
UWM CEO, Mat Ishbia can often be heard in the main stream media pushing awareness for independent mortgage brokers, so that more consumers know that this discount home loan option is available to them.
The technology that large budget, high overhead mortgage lenders created in the past 10 years is no longer new. It’s expensive, and in many cases it’s out of date.
By bringing together tens of thousands of independent mortgage brokers under this single, next generation business automation platform, consumers will benefit from the collective experience of the wholesale lending community.
This is great news for both mortgage brokers and consumers.
In my 20 year career in the mortgage and real estate industry, I have been a mortgage lender and a mortgage broker. The following is my attempt to help regular people understand what I’ve learned about getting a home loan.
This is my own personal experience and opinion. I’m not the only one that feels this way, our own Expert Loan Officer, Evan Wade is very active on social media educating consumers about how they are being taken advantage of by high overhead business models.
What Are My Options?
Did you know that there are many different businesses you can go to for a home loan? You might be surprised, or maybe not, at the answers I get to that question.
I talk with many people from this website about mortgages, and while many know there are options, I am sometimes caught off guard by how shocked folks are to learn about the differences, and the consequences of making the wrong choice.
I’m not sure how easy all of this is to understand if you’re not in this business every day, so I’m going to do my best to make heads or tails of everything. Let’s start by looking at each of the most common sources for getting a home loan, and unpacking what they are great at, and what they are not so great at.
Most Common Sources for a Home Loan:
- Depository Bank
- Credit Union
- Direct Lender
- Mortgage Broker
- Portfolio Lender
- Private Money
We have had over 1 million visitors to this site since 2010. I have answered thousands of questions, and hopefully solved thousands of problems. The following descriptions of each of these sources for getting a home loan are my option and experience.
I’m sure if you asked an employee of one of these organizations they would tell you that I am crazy. Maybe I am. You can be the judge of that.
Your depository bank can be a good option if you are highly qualified. If you are a high net worth client of your bank, the private banking services of most depository banks are hard to beat in the open market.
For most other folks, most banks have very strict overlays, which mean they make underwriting guidelines more restrictive. They only accept the highest quality credit profiles that include low debt to income ratios.
The best example I have heard of this is the issue of qualifying for a mortgage with student loans. I have heard from many folks that their depository banks that a calculation of 1.25% was going to be used to estimate the student loan payment for debt to income qualifying purposes. The calculation required by Fannie Mae is 1%, not 1.25%.
It is not unusual for someone to be told “NO” by a depository bank, only to talk to an independent mortgage professional that is allowed to follow the guidelines without restrictive overlays.
What most consumers also do not know is that a loan officer at a FDIC insured depository bank is not required to maintain the same continued education requirements that other NMLS licensees are. They are not allowed to veer outside of small box defined by the bank.
A credit union is also a great option if you are highly qualified. Credit unions will often provide greater flexibility than any other lending source due to them lending their own member’s deposits.
In some ways, credit unions are amazing, and offer below market, or outside of normal guidelines approvals. In other ways, they can be more restrictive with product offerings.
As with a depository bank, it is not unusual for someone to be told “NO” by a depository bank, only to talk to an independent mortgage professional that is allowed to follow the guidelines without restrictive overlays.
If you qualify for a Credit Union program, and you’re ok with the terms, chances are you’ve got a great loan. If you do not get approved, don’t fret, most credit unions cannot offer FHA Government insured mortgage loans, and are fairly strict when it comes to analyzing credit and the ability to repay.
A direct lender will often state that they “lend their own money”. It’s not exactly like that. Some do, don’t get me wrong, it’s definitely possible.
Most direct lenders have large credit lines which they in turn offer and underwrite to their investor’s guidelines, and then offer their own mortgage loans.
Some direct lenders will offer portfolio programs, these are becoming more and more common.
Direct lenders do have in-house underwriters and processors. They often have a large staff of management, middle management, sometimes retail outlets, employees, staff, buildings, lawyers, compliance attorneys, and so on….
All of this translates into a “pad” that needs to be baked into the interest rate. Direct lenders make money originating mortgage loans at an interest rate that accomplishes their financial commitments.
Lenders buy the money at one cost, mark it up, and resell it to qualified applicants based on their ability to sell it to an investor to pay dow the credit lines to turn around and lend the money again.
Direct lenders can be highly efficient and well-oiled machines. But when they’re not, you’re still stuck with the broken machine. This is happening now with interest rates.
My personal experience as a direct lender from 2008 until 2015 was both good and bad. When mortgage brokers were being blamed for the crash in 2008, being a direct lender was a safe place to continue to serve my clients.
Eventually, it became painfully clear that we were not looking out for our client’s best interest by charging higher rates and fees than what we could offer as an independent mortgage broker.
Mortgage brokers are independent mortgage professionals that have the ability to match consumers with a wholesale mortgage loan investor that specializes in your specific credit profile.
Where direct lenders, depository banks and credit unions all have one set of underwriting guidelines, mortgage brokers have access to hundreds of underwriting teams. No at one wholesale lender may not be a No at another wholesale lender. More choices always mean lower prices and better options for consumers.
One of the most important reasons for me going back to the mortgage broker model in 2015 was the ability to have access to an almost unlimited number of resources for solving almost any residential home loan challenge. Self employed? No problem. Low credit score? No problem. Bankruptcy yesterday? No problem.
Mortgage brokers are not responsible for hiring any staff other than what it requires to run their streamlined business. A mortgage broker chooses the best wholesale mortgage lender that matches your credit profile, and the lender pays the broker after funding the home loan.
This is a significantly streamlined business model than the other options. The independent mortgage broker model is a low overhead model since the wholesale lender employs most of the production staff required to approve and fund home loans.
This low overhead business model translates into lower prices being passed directly to consumers.
A portfolio lender typically lends from a pool of money dedicated to this purpose. The underwriting guidelines for this money is determined by the custodian of the fund. A portfolio lender can offer any terms they wish.
These loans are normally only available through a mortgage broker or lender, and are rarely available directly to the public. Expect slightly higher interest rates (2-3% higher) and slightly higher fees, but not always.
The word “portfolio loan” is a very broad term for a wide variety of out of the box underwriting solutions.
Portfolio loans are an important part of most independent mortgage broker’s toolbox. You can also find direct lenders that offer portfolio loan programs.
Portfolio loans are becoming more and more common, and easier for consumers to access. I like seeing this responsible lending product more widely available to consumers.
Private money is usually associated with hard money, and that’s pretty accurate in most cases. This isn’t a bad option at all. If you have no other options, it all comes down to the math.
Private money loans are usually for non-owner properties only, and require a large down payment or equity. Expect close to double digit interest rates, and short terms from 6 months to 3 years.
This type of financing is most often used as a short term loan for fixing and flipping investment properties, or some other property that needs work before it can qualify for traditional financing.
Private money is a great option when you know what you’re doing and you’ve closely considered the risk and reward of the transaction.
More Expensive is Not Better
There is often this idea that more expensive things are of higher value in some way. That’s true with some products like automobiles, fine dining, vacations or homeownership, but it’s not true if you’re paying a higher interest rate because of an inefficient and expensive business model.
This is most commonly found with any lender that you see on a television commercial, or on national radio ads. These are typically big box tele-mortgage shops that live off of refinances from the low interest rates of years past.
These business models are struggling to be relevant in this market, but are still required to pay the bills in the meantime. Hundreds of millions of dollars in advertising has to get paid somehow!
Now that the market is shifting toward a home buyers market, these companies are being required to charge lender fees on top of significantly higher interest rates than what can be found with a mortgage broker.
Think about how you learned about the lender that you chose. Then think about what else you know about them? All things being equal, I mean, they are experienced, professional, follow and communication are dependable, it comes down to what one’s over head is compared to another’s overhead.
When you compare the interest rates and fees of high overhead business model to the interest rates and fees of a low overhead business model, you will unquestionably see how the high overhead model passes this cost on to the consumer.
Look for experience and expertise first, then compare cost. My experience is that you will find both a lower cost and higher level of experience with an independent mortgage broker.
The Cost of Your Interest Rate
The best way to think about now interest rates get to where they are when you, the public sees them, is to compare it to stacking layers of mark-up. Yes, mark-ups. That means you have the base cost of your interest rate, then you stack expenses and costs on top of that until the lender hits it’s profit goals. That’s how it works.
All loan officers have access to money at a certain cost. A mortgage broker like myself gets to shop hundreds of wholesale lenders for who is offering the lowest rate at the time. In reality, this is really only about 5-7 lenders that consistently show up on top.
As a mortgage broker, the wholesale interest rates we are looking at includes the lender we choose paying us after we send them the business.
How Lenders Calculate Your Interest Rate
A lender secures a pool of funds of X number of millions of dollars at a specific cost. A lender then ads to it, their operating costs, and the profit margin they would like to make, and any other underwriting and processing fees they can throw in there, and you have what the rate needs to be to pay for all of those costs.
It is not uncommon for a direct lender to make 5 or 6 points off of a FHA or VA mortgage loan, while mortgage brokers make approximately 2 points, which are paid by the lender, not you, the borrower.
Even though a direct lender or depository bank can secure the money at a much lower interest rate, their overhead loaded business model prices them far outside of what an independent mortgage broker can offer.
Mortgage Broker Success Story
Josh Lewis is an owner at BuyWise Mortgage, a California Mortgage Broker. To be 100% transparent here, Josh Lewis is my business partner.
Every week, Josh records a weekly interest rate update for our website at BuyWiseMortgage.com. This week, at about 2:25 seconds, Josh start telling a story that I’ve heard a couple of times now, but I still don’t believe it.
With that, probably the most important thing I wanted to hit on this week, seeing a couple of crazy things. We actually closed a loan last Friday for a borrower who had some credit challenges. It was a FHA loan. They went to a direct lender.
It was actually a family member of theirs. They were supposed to close at 5.5%. They get to closing their loan docs, go out at 6.125% You’re like, that’s pretty awful. But, the worst part was they were paying a 1.5% in origination, and $2,200.00 in lender fees on top of that.
Long story short, our realtor put us in contact. We were able to get up the loan closed for about 1% lower with no lender fees, and a .50% credit versus a 1.5% cost. A full percent difference in the interest rate. 2% difference in the origination fee, and it eliminated all closing costs for them.
Strangely, I saw another number from another realtor said that, “Hey, can you give me a second opinion on this?” Borrower came in with their own lender, a VA loan.
A veteran of all people, they had a quote again at 5.125%, and you would think that would come with a big lender credit to cover their closing costs, ’cause the borrower wanted to do a true VA no-no, and no down payment and no closing costs, but the loan officer was instructing the agent to ask for $7000.00 in closing costs credit on a 5.125% loan.
Essentially that same loan, we could do at 4.5% and cover all of those costs, and not have to get any credit. Or, if they did get the $7,000.00 credit, we get 3.875 right now.
This story is all too common. Maybe we just hear this story a lot because we are in the business, we talk to other lenders, and we have thousands of people a month come to this site to get answers to questions.
Experience Counts More Than Anything Else
Your options are limited to the ethics, experience, and professionalism of the person you are talking to when you apply for a home loan.
By far, the biggest offenders of misleading, incomplete or just inaccurate information are inexperienced staff in a hybrid customer service / loan originator position.
I am not saying you wouldn’t have a positive experience using any of the business models we’ve talked about here.
This does not automatically mean that a person working at a mortgage broker is experienced with your specific scenario. This also does not mean that you will not find an experienced, professional, and ethical loan officer at a depository or direct lender.
The single most important take away here is that you should be working with an experienced professional when getting your next home loan. All things being equal, experience, ethics and service should guide you to the right place to do your next home loan with.
Now that you understand that a good loan officer is separate from the company that they work for, you can make a more informed choice.
NMLS Consumer Lookup Tool
ACCESS NOW – www.nmlsconsumeraccess.org
The Nationwide Mortgage Licensing System makes it simple to lookup the licensing status of your loan officer. The most important information you can get from the NMLS database is the work history of the loan officer.
It is not uncommon to find a licensed “mortgage loan originator” with an incredibly limited time in the business. When you run into a bad loan officer experience, you’ll usually find that this person has worked for 15 lenders in 5 years, or they have spent 100% of their time at one employer with a highly structured business model.
The above image is a NMLS consumer report for an inexperienced mortgage loan originator that I caught misleading a Veteran by leaving out important fees on a Loan Estimate that was given to the consumer in good faith.
The interest rate the loan officer was offering was .24% higher than we already had locked (it was a direct lender), the lender fees were $3,800 higher than ours (we do not charge lender fees), and the loan officer was trying to sell a payment that was $200 lower than what I was offering.
The attorneys said that it is a standard industry practice and not illegal to give the consumer a loan estimate that does not properly calculate their projected property taxes, and they are correct. It is not illegal, but I’ll bet that happens far less, if at all when you’re talking to a mortgage professional.
Buyer Be Aware
Buyer beware does not adequately describe the arrogance of high overhead business models that spend millions of dollars on advertising and public relations to try to convince you, the consumer, that there’s no point in shopping around for a home loan.
I hope that with the help of this article, you can Be Aware of your options. Empowered with this knowledge, I hope that you can now make informed financial decisions based on expert advice and facts, not funny TV commercials.
Working with Professionals
I can not emphasize enough the importance of hiring a professional, experienced Realtor and loan officer when selling or buying your first home.
When you call a lender from a TV or radio commercial, or click an ad you saw on the internet that has a catchy headline, you are playing competence roulette.
I personally have been in the business for close to 20 years, and started this website 10 years ago to educate and empower consumers.
We have had over a million consumers visit this website and I have answered many thousands of questions from folks all over the Country.
If you are outside of California, I can introduce you to a loan officer from our Expert Network that I personally know and trust.