Bank, credit union, broker, or direct lender? What is the difference, and where is the best place to get a home loan? Having worked for a national bank, a broker, direct lender, and having interviewed with a credit union, I can provide some insider information. Here are some facts most consumers don’t know.
A mortgage broker shops wholesale lenders to find the best option for your loan. Think of a travel agent shopping airlines for you. Some people assume that using a broker costs more–a middleman fee–but that is not true. Because brokers go to wholesale lenders, they can often find you cheaper financing than if you go directly to your retail bank.
Brokers are required by federal law to obtain a loan officer license from the National Mortgage Licensing System. This means they must attend classes in lending law and requirements, then pass a rigorous test that about 30 percent of applicants fail. They must also be fingerprinted and pass a background investigation and credit investigation.
A direct lender uses their own money to lend rather than broker out to wholesale. Using in-house underwriting is sometimes an advantage for closing faster and for getting a more streamlined approval.
Loan officers working for a direct lender must obtain their NMLS license, passing all tests and background checks, the same as for a broker.
A bank also uses their own money, but typically, they do not close faster or easier. In fact, the large banks are usually slower and have tougher underwriting requirements to pass. It is not unusual to be asked for more documentation in the 11th hour, requiring getting an extension on the loan.
Loan officers at a bank do not have to get a NMLS license. They do not have to pass an NMLS test. They do not get fingerprinted or have a background investigation. I personally know of a case where a woman who was under investigation for loan fraud waltzed into a big bank and was promptly hired.
Everything above that applies to a bank also applies to a credit union. Some credit unions have excellent pricing and service, but others have horrific service. One popular West Coast credit union that I interviewed with has a bad business model. They have application takers in their branches, then those applications get passed on to a regional loan officer who handles dozens of branches. So the person you met with in the branch is not your actual loan officer, nor does that person have any training in mortgage loans. I’m sorry, but that is not my standard of service when it comes to something as monumental as buying a house.
FULL SERVICE MORTGAGE LENDER
I’ve saved the best for last. A full service mortgage lender has their own money to lend (like a direct lender) but can also broker out when needed. This gives the most options and the most flexibility.
Loan officers must meet all NMLS licensing requirements and pass all investigations and checks.
Personally, I work for a full service mortgage lender, and I like having more choices for my clients. I am state licensed in WA and CA, so I have taken state courses for both states, and have passed state tests as well as the big national test. I was fingerprinted twice and have passed all background tests, including an annual credit investigation.
“What are your lender fees?” I asked the loan officer (LO) at the credit union. I was shopping for a mortgage for one of my coaching clients, and I explained the scenario: No cash out refinance, 15-year fixed rate, 80% loan-to-value, A credit.
“We don’t have any fees,” said Ms. LO.
I thought that was impossible, so I replied, “I am not talking about having no points. I need to know what your lender fees are, such as underwriting, processing, and any other fees.”
Then to be crystal clear, I added, “I need to know the dollar amount that will show on the Good Faith Estimate, page 2, #1, ‘Our Origination Fee’.”
“Just a minute, let me go check with my manager,” she said.
I waited. When she came back, she said, “My manager says we don’t have an origination.”
“Wow, that’s great! I’m going to have my client call you,” I said. I proceeded to tell her my client would call in the morning, because it was just a few minutes to closing time. Ms. LO thanked me and said she’d look forward to helping her.
You can imagine my shock and surprise when my client emailed me the Good Faith Estimate she received from Ms. LO at the credit union the next day. Take a look for yourself:
YOUR ADJUSTED ORIGINATION CHARGES
1. Our origination charge 1,954.00
This charge is for getting this loan for you.__________
Instead of a zero charge, there was a $1,954, almost two thousand dollars!
Outraged, I called Ms. LO to ask about this switcheroo.
“You remember quoting me a zero origination fee,” I reminded her. “So why does the GFE show a $1,954 origination fee?”
Long pause. Then, “I don’t know.”
“That is a very big different, almost two thousand dollars,” I said.
“Yes it is. Hold on while I go ask my manager,” she said.
After several minutes, she was back. “My manager says we changed the fee yesterday.”
“You changed the fee from zero to $1,954 all in one day? From 4:00 p.m. to the morning, it changed that much, all at once? I don’t think so,” I said.
“Unfortunately, it changed,” she said.
“Changed, as in bait-and-switch?” I asked.
What is bait-and-switch? It is when a company baits you with one cost and then changes it to something else when you try to get it.
Bait-and-switch is illegal. But it is still happening.
The new lending laws have not extinguished all the liars. Liars are lurking in all institutions: banks, brokers, and yes, also in credit unions.
This is why I tell people they cannot choose a mortgage by the type of lending institution. I don’t name names on my public blog, but if you would like to know the name and location of this credit union and the loan officer, send me an email via my Ask a Question page (in the toolbar above), and I’ll be happy to tell you so that you can avoid this crooked institution.
If anyone tries pulling a bait-and-switch on you, I would encourage you to report them to the Consumer Financial Protection Bureau. That is what they are here for, to protect you. The handy online complaint form is here.