Real Estate Financing: How to Choose Between Bankers, Mortgage Bankers & Brokers
Have you ever been confused about whether your loan officer is a banker, a mortgage banker, or a mortgage broker? Did you even know that there were three types of individuals to help you with your investment property financing? Does the individual work for a bank, or do they work for a broker? Which is most common?
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These are just some of the questions that I hope to answer in this post today. Over the last 5-10 years, there has been a major shift in who does what in the lending world. I would estimate that before the financial crisis in 2008, there were are lot more mortgage brokers than there are today. As new regulations have come out with the Dodd-Frank Act and everything associated with that, there has been an increasing discrepancy between a banker, a mortgage banker, and a mortgage broker.
The Difference Between Bankers, Mortgage Bankers & Brokers
A banker is an individual who works for a bank or a savings and loan institution. The bank is usually a brick and mortar business. Banks like Wells Fargo, Bank of America, Chase, and US Bank are all examples of places where bankers work.
Traditional banks usually offer a suite of financial services — anything from checking and savings accounts to wealth management and investment advisory services. The banks are also required by law to provide loans with a percentage of their deposits. These loans include personal loans, auto loans and mortgage loans.
When a banker originates a mortgage loan, the banker is lending a fraction of the bank's deposits. (Actually, it's a little more complex than that, but I won't go into it here.) Some advantages of getting a mortgage loan from a bank include competitive rates and one stop shopping for your all of your financial needs. On the other hand, the disadvantages include a small range of products, usually very conservative underwriting, long processing times (especially for refinance loans), and usually the appraisal and underwriting is managed through national channels.
A mortgage banker is an individual who works for a bank that only specializes in mortgage lending. Mortgage banks are typically started with a warehouse line of credit (from a big bank), and their sole job is to originate mortgage loans. Some examples of mortgage banks are Stearns Lending and Quicken Loans. Eventually a mortgage bank will use their own capital to lend to the consumer.
When a mortgage banker originates a loan, they have the same advantages of banks, including competitive rates, but they usually also have in-house underwriting, which allows them to close loans quicker, local appraisers who know the market a little better, and often have more products to get into niche loans. Some disadvantages include no physical presence for servicing issues (since they lend their own money), and they offer no other financial products if you want a one stop shop.
Lastly, a mortgage broker is an individual who works for an autonomous real estate organization who brokers (acts as a middle man) a bank or mortgage bank’s money. A broker can have one relationship or as many as they want with banks in terms of who they do business with. They are often required to be licensed by a state’s department of real estate as well as the national mortgage licensing system (NMLS).
Some advantages of mortgage brokers include a wide variety of products, competitive wholesale rates, and typically a local presence. Some disadvantages of mortgage brokers include non-localized underwriting and no other financial products (similar to that of the mortgage banker).
Typically a bank will focus on the products that make them the most money, and those are the cookie cutter, residential, owner-occupied loans that makes up a large percentage of the real estate lending market. They have an endless supply of leads as they are often the first place a primary home buyer (or refinancer) would look to shop for a mortgage. As noted above, they don't typically cater to the investor market unless youre deposits are with that bank, in which case they may help you for the first couple of loans you work with them. But any loan that is out of the ordinary and doesn't fit the "typical" requirements, well, good luck!
Mortgage bankers usually focus on similar products as banks, but in many cases they have the ability to broker out their atypical loans to other mortgage banks as well, which is definitely an advantage. Mortgage brokers have the ability to go really deep and find hard money lenders and private investors to broker their loans to. They both can typically do small commercial loans (depending on your state).
So what’s the point of all this? Well for you as a residential real estate investor, I hope it guides you in the right direction as far as where to find financing. I would say that traditional banks are probably not the best place to start when going to find a mortgage for an investment property. A mortgage broker or a mortgage banker has many more advantages as far as finding niche products. They are usually localized in your market and usually offer the competitive advantage of being able to get creative with financing and solutions. Both mortgage bankers and mortgage brokers can close quickly, which is an advantage in purchasing property, as it adds another dimension to offers for purchase.
What are your experiences with residential real estate lending? Have you found someone that is more helpful than another?
Leave a comment, and let’s talk!