Should I go to mortgage broker or straight to banks?

Question

I am looking to house hack my first rental property with an FHA loan. A 3 or 4 family in Rhode Island. I was wondering if I should go to a mortgage broker or go shop mortgage lenders. I am very new to this. Any feedback appreciated thank you!

Chris Mason · Answer

The #1 wholesale (ie, through brokers) lender in the country and the #1 retail mortgage bank (ie, consumer calls the bank directly) are within 45 minutes of each other in Detroit. Detroit is no longer "motor city," it's "mortgage city." That #1 retail mortgage bank also has a wholesale division, meaning you can get a loan from them by calling their 1-800 number (pay retail price), or by calling a mortgage broker (pay wholesale price).

Here is some trolling by #1 in wholesale against #1 in retail.

What the wholesale lender is pointing out is that a banker who works for that bank is forced to offer the consumer a higher interest rate / closing cost combo than what they'd allow a random mortgage broker who does not work for that bank to offer to the exact same consumer, from the exact same mortgage bank, on the exact same day. The question begged is "what's the point of working for a bank directly? Even if I really like the mortgage bank in question, I could just go become an independent broker, broker 100% of my files to that bank (so zero changes in who underwrites, what the guidelines are, who is appraising, etc), and the consumer gets a better deal...."

This is currently the norm, when I was a mortgage banker (="direct lender," they are synonyms) for 5 years, towards the tail end they went to great lengths to ensure we never saw the wholesale rate sheet that my own employer was handing out willy nilly to independent mortgage brokers. I made the switch as soon as I figured that out, along with some other things not pertinent to OP question.

(Note that rates change daily, the specific pricing they are showing is from summer 2018 when rates had hit 7 year highs, but the difference is still there, and is the point they are driving at)

Up to you how you want to play your cards.

Note that there's an implicit bias in anything I post, in my area large loan amounts are the norm. I don't price things out at midwest zip code price points, but there's reasonably credible reason to believe mortgage banks might be a better deal if $50,000 mortgages are the norm in your area due to some economy of scale issues with the wholesale brokered mortgage model.

Lurkers: If you are reading this post 5 years from now b/c you found it on google (or "space google" b/c it's the future), and my signature block shows that I'm a mortgage banker again, there's probably a reason, that would be a pretty good indication that the market shifted again. It happens. At various points in history, you might have been better off calling the bank directly (I'm writing this in 2020, not in 2012 and not in 2028). Anyone can come up with a pair of competing theories for why one might  be better than the other, which theory is true depends on when you are asking, I can't predict what the future might bring, but I'm not really super loyal to any particular mortgage distribution channel.... a lot of old time mortgage brokers became bankers after the crash (banks got bailed out, brokers didn't, broker market share dropped to like 0.1%), and remain bankers in spite of the market switch, just because they are old and comfortable and don't like change.

Anthony Thompson · Answer

I would do both, I'd check out the rates of local lenders yourself and find the best one you can, then also talk to a mortgage broker to find out if s/he can beat it. I'd even recommend adding a third option, talk to RI Housing directly yourself to see if you qualify for any of their programs as they often have great programs at different points of the year if you meet income and other requirements.

Just make sure that before any of them actually pull your credit you're ready to start the clock and get all your potential lenders pulling your credit within the same time window so it doesn't negatively affect your score (I've seen 14-45 days depending on which scoring system is used). You'll know this is about to happen because you'll have to sign documents with your SSN allowing them to do it.

Tyler Rowland · Answer

@Chris Mason I always love hearing you input in Mortgage related posts.  This is no exception, and I second everything that you said.  Not much to add here, except people would do well to find the experts in multifamily financing.  The best way to find that out is asking around.  Talk to realtors, ask on your local facebook community pages who has bought multifamily housing, and who they went through for financing.  Though you may get inundated with a lot of info you don't need from members of your community (know from experience.)  You are sure to find someone.  Also, check and see if they are on bigger pockets.  That does give some indicator of their interest and expertise in multifamily properties. Good luck!

Tim Johnson · Answer

I would go to a broker and have them shop it for you.  If you go bank, your going to possible have your credit pulled a bunch of times.

Melvin List · Answer

Funny but true article @Chris Mason.  @Taylor Tomaso I would try a mortgage broker for any FHA/VA loan scenario.  Mortgage brokers are capped at how much money they can make legally on your loan.  Direct Lenders are can make sometimes double what a mortgage broker can make just by raising your rate .375 to .5%.

David Lilley · Answer

@Chris Mason, ah! Good point. Never had to engage a mortgage broker for residential. I'm sure you would know better than I.

Chris Mason · Answer

Yes, but you had mentioned FHA, so I was thinking you were talking residential.

David Lilley · Answer

@Chris Mason maybe in the residential realm; definitely not in commercial.

Chris Mason · Answer

That's unusual. Nearly all mortgage brokers these days are compensated solely by the lender (funds the bank would have otherwise spent on marketing, is typically where it comes from). It's actually illegal to get paid both by the lender and by the borrower, except for at-cost 3rd party fees (appraisal being the big one). I am assuming here we are talking about vanilla FNMA/FHA/etc type institutional loans, not private money, HML, non-qm, etc.

David Lilley · Answer

@Taylor Tomaso you are going to pay a 1% fee if you use a mortgage broker. You can find an endless amount of lenders who offer FHA loans and their rates will pretty much be the same. No sense in paying 1% for a product that easy to find.

Should I go to mortgage broker or straight to banks?

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