One of the first decisions consumers have to make when deciding which mortgage company to close their mortgage with is if they want to work with a mortgage broker or a mortgage lender. There is actually little difference between the two once you look at each business structure in detail.
A mortgage lender uses a line of credit to fund the loans in their name. Once the loan closes the lender immediately sells the loan to a servicing bank and repays their line of credit before the 1st payment is even made on the new mortgage. When they sell the loan to the bank they get paid a commission based on the rate of the loan and the loan amount.
A mortgage broker does not fund the loan in their name. Instead they find a bank that will fund and service the loan. Like a mortgage lender that sells their loan to the servicing bank, a broker typically gets paid a commission called Yield Spread Premium (YSP) for arranging the loan for the servicing company.
One difference between a broker and a lender is that the broker has to disclose on the Good Faith Estimate how much the YSP is while the lender does not need to disclose it.
Both a lender and a broker work with the same set of guidelines provided by the loan servicers (banks). A lender does not have any special authority to fund a loan if it does not fit into the guidelines because they still have to find someone to buy the loan once it closes so that they can pay back their line of credit that is used to fund the loan.
In most cases the rates that lenders and brokers offer should be similar since neither are creating their rates internally.
So you might be asking then if brokers and lenders get their rates from the same places (mortgage banks) then why do rates sometimes vary so much between different companies? The reason is that some companies are trying to make more or less YSP than their competitors. Since part of the YSP is determined by the interest rate on the loan (the higher the rate the more YSP that is paid) some companies will be willing to offer a lower rate and make less commission on the loan than other companies. Essentially you will get the best combination of rate and closing costs when you find the company that will do your loan for the lowest commission.
At HomeQuest we became a rate leader in the market by offering our borrowers lower rates that pay us less YSP then most companies are willing to do a loan for. We are set up to do a high volume of loans at lower YSP to make sure that our borrowers are getting the best loan possible. Other companies will try to do just a handful of loans per month but make much more on each loan by giving their borrowers higher rates and fees.
We believe that our philosophy works best for us because it gives our borrowers a better loan and in return earns HomeQuest repeat business from our borrower in the future as well as referrals from their friends and family.
There are some mortgage companies known as portfolio lenders that will originate and service the mortgage. Rates offered by these banks are normally higher than rates offered by mortgage brokers. If a mortgage broker has a broker agreement with the mortgage bank often times they can get the borrower lower rates than the borrower would be able to get if they went directly to the same bank. The reason is the bank has less overhead fees when the loan is brokered to them. They do not have to pay an internal processor or loan originator on the file or spend any marketing dollars to get the loan. Instead they just pay the YSP to the mortgage broker which is cheaper than their internal costs would be if they originated the loan themselves. Therefore they can give the mortgage broker lower rates to offer potential borrowers than they can offer directly to the borrowers themselves.
Another benefit of working with a broker over a bank is banks are restricted to offer potential borrowers loans within their banks portfolio. If they don't have what you are looking for you have to go elsewhere to find the loan that is right for you. A mortgage broker can do this ahead of time by checking different banks guidelines until they find a bank that offers the type of loan and rate you are looking for from the start.