As a first-time homebuyer, you’ll hear a lot of advice telling you to shop around for a mortgage.
Ideally, this doesn’t just mean contacting a bank or two. It also means talking with different types of lenders and brokers. But, frankly, it can be hard to tell the difference between these options—particularly between a mortgage banker and a mortgage broker.
In fact, while you’ll often see those two terms used interchangeably in the media, they’re not quite the same.
“A mortgage broker is very similar to a mortgage banker or even a bank in the consumer’s eyes,” says John Councilman, president of the National Association of Mortgage Brokers.
Both will look at your income, down payment, and credit history to try to determine the best mortgage for you at the best rate. Though the customer service and loan offer may vary, the borrower’s experience with each is likely to be similar.
“The key difference is that mortgage bankers and banks must establish lending guidelines applicable to their particular institution or organization,” Councilman says. “The mortgage broker is able to analyze the borrower’s situation to ascertain which lender’s programs best fit the borrower.”
Comparing mortgage brokers, mortgage bankers, and banks
A mortgage broker is sort of a middleman between you and a number of different lenders, while a mortgage banker is more of a one-stop shop for all of one lender’s products, says Tamara King, associate vice president of loan production for the Mortgage Bankers Association.
Most lending institutions follow rules set out by mortgage giants Fannie Mae and Freddie Mac and by the Consumer Financial Protection Bureau. But beyond that, each bank may have separate rules and guidelines that dictate the interest rates and terms of the mortgages it offers, as well as which buyers qualify for them. This is why it is recommended that you shop around for a mortgage—when you shop for different loans, you will get different offers. A mortgage broker can help facilitate this shopping process by looking at a number of different lenders’ options and seeing which loan is right for you.
Both mortgage brokers and mortgage bankers are trying to find the best fit among the products available to them, King says. However, the experience in working with each may be a little different.
Independent mortgage bankers, which focus exclusively on mortgage lending, are typically smaller, regional companies. They usually borrow the money for your home loan from larger lenders and focus on government-backed loans such as Federal Housing Administration and Veterans Affairs loans, according to the MBA.
Mortgage brokers tend to be even smaller and more localized. Usually, only one or two people operate the broker company, and all the products they offer are coming from banks or mortgage bankers.
This leads many people to assume that a bank is the cheapest option because there’s no middleman between you and the money. That’s not always true.
“Most mortgage brokers are paid by the lender in a fashion not dissimilar to what the lender would pay one of [its] own branches,” Councilman says.
When you’re looking for your first home loan, it’s important to look around at all these different options—not just at different lenders within a single category.
You can frequently make this process easier by simply calling different lenders and brokers and running some of your information past them to get a taste of what they can offer. Each category offers a slightly different flavor, and borrowers should consider the rate, fees, and personal service provided by each to get the best deal. A home is probably the biggest purchase of your life, so shop around until you find the right loan for you. You may want to consider meeting with a lender of each type—a large bank, a smaller regional bank, and a mortgage broker—to see what each can offer you.