The Lender: Bank or Mortgage Banker?

Mortgages are marketed (that is to say, offered to you) by several types of lenders. You can find a loan from mortgage brokers, mortgage bankers, banks, credit unions, and savings & loans. In most cases, the lender earns origination fees, and in the case of a mortgage broker, a broker's fee. The servicer is the company where you, the borrower, send your payment.

What Is a Mortgage Broker?

Mortgage brokers are much like independent insurance agents, or, for that matter, your local supermarket. They have access to many lenders (roughly equivalent to suppliers, such as tomato companies) and many different programs (several brands of frozen, canned, or fresh tomatoes). In some cases, especially where credit is not flawless, and nonconforming properties are involved, a mortgage broker can find funding for you. (They may also be able to find tomatoes for you, but that's extra.) They charge a fee, and are sometimes compensated by the lenders. They provide a great service for many consumers, and originate over 50% of loans in the country.

Mortgage brokers normally originate the loan, process it, and pass it along to a lender, who sells it to an investor. These investors range from state pension funds to government and quasi-government companies such as the Federal National Mortgage Association (FNMA), or "Fannie Mae"; the Federal Home Loan Mortgage Corporation (FHLMC), or "Freddie Mac"; and the Government National Mortgage Association (GNMA), or "Ginnie Mae." A mortgage broker can in many cases speed up your closing time, do all the processing, and get you a better rate.

The mortgage broker is compensated on commission, and he is going to have higher closing fees. At a given mortgage brokerage house, for example, closing fees might be $700. But some in the brokerage industry charge up to $1200 -- which some of their colleagues (and, indeed, the real estate agents with which they work) might regard as gouging. A broker is allowed to charge whatever he wants for loan processing or "doc prep" -- document processing.

As is the general rule in shopping: ask. Ask what the broker's fee will be. You can then make an informed decision as to whether paying that fee will be worth it over time if you get a better deal on a loan.

Banks and Mortgage Bankers

The term "mortgage banker" can refer either to a loan officer who works at a bank or to the bank itself. A mortgage banker generally sells the underlying loan to an investor, but continues to service the loan.

Banks generally have a corporate approach, in which the mortgage bankers are told, "These are the fees -- don't deviate from them." So there is more stability in terms of what the person sitting across the desk from you is going to charge for his services .

Which Should You Use?

Whichever gives you the best deal. That's why you should shop around first and find out all you can.

Some borrowers don't like the idea that the mortgage broker will find them the loan and then exit the picture, leaving the borrower to deal with a lender. On the other hand, the borrower will be dealing with a lender anyhow, and mortgage bankers might also end up selling the loan on the open market. What does that mean? Well...

This Loan Is for Sale

There is a market for mortgages just as there are markets for tomatoes, potatoes, running shoes, or designer suits. Your mortgage, once you get it, may be sold later to FNMA. FNMA buys mortgages and, in some cases, also takes on the servicing of these loans, after they are originated by the individual lenders. These loans usually carry the lowest interest rates.

Some lenders sell loans to funding sources other than FNMA, but usually these are types of loans that carry a higher rate of interest. Also, some banks and lenders hold their own loans (portfolio lending) and make their own credit and lending decisions. These interest rates vary widely.

If your loan is sold, you still have the same term, and the same loan; you just make the check out to another institution.