 Personal Finance PowerPoint Presentation Loan Officer versus Mortgage Broker Get ready to get financially fit by practicing personal finance. Remember that most finance decisions can be broken out into short-term and long-term decisions. The short-term decisions being those that we're going to train our gut in order to trust our gut, honing down our habits so we can depend on them to help make those decisions long-term decisions such as the purchase of a home being those where we have to have the adage of measure twice cut once because we cannot rely on trial and error. We want a more formal decision-making process which could include these five steps that we're going to break them out into. Number one, determine the home ownership need. Number two, find and evaluate property to purchase. Number three, price the property. Number four, obtain financing. Number five, close the purchase transaction. So we're looking at the loan officer versus the mortgage broker. Most of this information can be found at Investopedia, which you can take a look at and you can look for the references and the resources continuing your research from there. This is by Matt Ryan Webber, published January 6, 2022. If you are looking for a mortgage, you have two main options when it comes to getting advice. One is a loan officer and the other is a mortgage broker. So clearly, when we're purchasing a home, we typically don't have the cash to put down for the home. We need to get some kind of financing, possibly then needing help from either a loan officer or mortgage broker. In some ways, the roles of both are similar. Both a loan officer and a mortgage broker will ask you questions about your financial situation and help you fill out a mortgage application. But in other ways, the roles are very different. A loan officer works for a big credit union or other mortgage lender and offers programs and mortgage rates from just this institution. So they're working for a financial institution. A mortgage broker, in contrast, works on a borrower's behalf to find the lowest available mortgage rates and the best loan programs available through multiple lenders. So we're talking about loan officer. When you're talking to a loan officer, the first thing you might think when you're trying to get a loan is like, I'm going to go to the financial institution that I work with, the one that I trust, and you're probably going to be working with some employee of that financial institution which might be then a loan officer and they're giving you advice based on the financial instruments, the mortgages, the loans available for that financial institution. Or you might be expanding and saying, hey, look, I want to then do some comparing and contrasting through a wide variety of different available loans out there and this might be more necessary as you're looking for more kind of outside the box type of loans so if you're looking for more like adjustable rate loans and that kind of stuff, it's more likely that you're shopping around more and then looking for possibly a mortgage broker which then would be looking at multiple lending institutions and they're working on your behalf kind of like an agent type of situation to compare and contrast different opportunities, different loans across different financial institutions or other lenders. What is a loan officer? A loan officer works for a mortgage lender, a bank, credit union or other financial institution and their job is to help borrowers with the mortgage application process. So if you're going to an actual bank, you're saying, hey, there's my bank. I work with the bank. I'm going to go ahead and see if I can get my mortgage through the bank and then you're going to most likely work with a loan officer who's going to try to get the paperwork, gather everything together to help go through that process. Loan officers are often called mortgage loan officers since that is the most complex and costly type of loan most customers encounter. Loan officers must have a comprehensive knowledge of lending products, banking industry rules and regulations and the required documentation for obtaining a loan. Loan officers are knowledgeable about all of the various types of loans offered by the financial institutions they represent and can advise borrowers on the best options for their needs. So clearly if you're going to a loan officer, they are a specialist at their particular financial institution. They know the array of financial instruments that they work with. Now of course that array of financial instruments might not be the full array of financial instruments out there. For example, if you're working at a bank then you would expect the standard, more standard instruments would be there. The 30 year fixed loan is most likely going to be fairly constant from a large financial institution to a large financial institution. You're going to find more stability in that type of thing. But when you get into more exotic loans, getting loans from different areas, having the adjustable rates and so on, adjusting the periods then the complexity increases greatly. And then the comparability is going to become of course more and more important. Once a borrower and a loan officer agreeing to proceed, the loan officer helps prepare the application. The loan officer then passes the application along to the institution's underwriter and assesses the credit worthiness of the potential borrower. So if we're doing the straight loan, going right through the financial institution and the most kind of vanilla type of way, the plainest way you can do, I kind of like vanilla. But the straightforward kind of plain way that you would go through it, you go to the financial institution, you're going to go to the loan officer, you're going to get the array of loans that they might have there. And then once the borrower and a loan officer agree to proceed, the loan officer helps prepare the application. So we'll go through the application process. The loan officer then passes the application along to the institution's underwriter who assesses the credit worthiness of the potential borrower. If the loan is approved, the loan officer is responsible for preparing the appropriate documentation and the loan closing documents. So then they're going to close things up and wrap this thing, you know, get it going. Some loan officers are compensated through commissions. This commission is a prepaid charge and is often negotiable. Commission fees are usually highest for mortgage loans. So some lenders work exclusively with mortgage brokers providing borrowers access to loans that would otherwise be available to them. So now we're looking at the mortgage brokers here. So once again, some lenders work exclusively with mortgage brokers. Mortgage brokers are going to be those ones that when you talk to a mortgage broker, they might be dealing with multiple lenders. Typically they will be dealing with multiple lenders as opposed to one institution. And the fact that some lenders solely work with mortgage brokers would mean that you're not going to find as wide an array of loan possibilities or lenders possibilities out there, of course, with one financial institution that you might be going to. Although, again, if you trust the one financial institution and you're putting something together that lines up, you know, to, you know, the standard financial institution standards, then that's probably the first thing you want to go to get like kind of a benchmark possibly to start your process of researching and then move from there. But this could provide borrowers access to loans that would otherwise not be available to them. In addition, brokers can get lenders to waive application appraisal or organization and other fees. However, the number of lenders a broker can practically access is limited by their approval to work with each lender. So they got to get basically approval and approval process to work with the lenders that's going to limit how many lenders they can practically get involved with. That means that borrowers are generally best served by doing some of their own legwork as well in order to find the best deal. So the fact that, obviously, lenders are going to have a preference towards the, I mean, the broker is going to have a preference towards the lenders that they have the access to. So even if you get the broker, you might say, OK, that opens up the market completely. The broker should be comparing and contrasting every loan that is out there. But that still may not be the case even though they're going to have a wider range than you would expect to have at one financial institution. And therefore, if you're kind of shopping around on a more broad perspective, you may still want to do some of your own legwork, as they say. Keep in mind also that a big banks work exclusively through their own loan officers and do not waive fees. So if you're going through the standard process like the most well-beaten path with the big financial institutions that I got my bank account here, I'm going to go to the bank. Well, then you're probably going to work with the loan officers there and getting the mortgage brokers probably not going to go into like the big Bank of America bank and say, I'm going to try to get them to waive their fees or something like that. Now, the big bank is pretty much pretty standard. That's the standardization type of thing. It's less likely that's going to happen. But with other non-big bank financial institutions, the broker might have some more leverage on things like fees and stuff for institutions that are not possibly a standardized. That's my interpretation of it in any case. Mortgage brokers earn a commission from either the borrower, the lender, or both at closing. These commissions known as organization fees, origination fees are based on the size of the loan. Key differences in principle, working with a mortgage broker can save you a lot of time and money. Loan officers can only help you to apply for the types of loans their employer chooses to offer. So you probably do want to shop around. Again, you probably start by saying, okay, I'm going to go, I'm going to look at the big financial institution, for example, and then possibly use that as a baseline when you're shopping around on the loans and then possibly look into other options from that point to be comparing and contrasting to it. Mortgage brokers who can work within a mortgage brokerage firm or independently deal with many lenders to find loans for their clients. Because of this, brokers can give you access to a wide selection of loan types. This can save you a lot of time. Again, notice they're saying a wide selection of loan types. So notice that you can see a wide selection of lenders, right? You can have different lenders out there. You would expect that if you talked for the standard, like a 30-year fixed standard rate, good credit kind of loan, that there would be more stability from financial institution to financial institution. Those are the kind of loans that you would expect possibly the large institutions might be able to do well with because they're the institutions that would be mitigating the risk most. So if you had all the boxes checked off for the perfect loan, you're putting the 20% down, 30-year loan, and you got good credit in that whole thing, you would expect then the big financial institution might be a competitive area and other financial institutions might be similar. If some of those boxes aren't checked off and possibly if you're looking for other kind of loan types such as an adjustable rate and that kind of thing, then that's where you would expect the big institution may not be the most competitive area there or there might be other lenders that have different pros and cons. That's when it gets a lot more complicated fairly quickly. So this can save you a lot of time. It can take hours to apply for pre-approval with different lenders, and then you must handle communication with the lender and underwriters to ensure that the transaction stays on track. A mortgage broker can save you the hassle of managing that process. However, stay alert for extra fees and charges because a mortgage broker isn't paid a salary by a particular financial institution. They will charge you a commission and fees. So clearly the mortgage broker, you might compare to being more like slick, I guess, like more kind of car dealer. There might be on their own kind of business institution, their own business kind of thing, and making commissions which means there might be possibly more aggressive in that case you would expect than possibly someone working at a big financial institution who's basically going over the loans that are available at that big financial institution and possibly getting paid in a form not just simply by the commissions but also possibly by a salary situation. Clearly a commission-based payment will alter for the better or for worse. It could incentivize people, but it strives them to want to close this deal. So when choosing any lender, whether through a broker or directly, you can see these fees on the second page of your loan estimate form in the loan cost section under a organization charges. In addition, there can be some advantages to applying for a mortgage directly through a loan officer. Because they are employed by a mortgage lender, you may get a break on rates and closing costs. You may get an exception for unique income in financial situations and you might have access to more down payment assistance, DPA programs. If you take this route, your approval will also be handled in-house, meaning the lender can approve your loan and provide money to you directly. Is a loan officer a mortgage broker? No, so now is a loan officer a mortgage broker? No, very often home buyers do not understand the differences between a mortgage broker and a loan officer. So you want to be obviously aware of this. Are you working with someone who's a broker or are you working with someone as an officer? Are you working with someone that's in a large financial institution that basically is an employee of the financial institution and is tied to the resources of that large financial institution? Or are you working with someone who is going to be managing or looking into multiple financial institution? And that's basically what the service that they're providing there. A loan officer works directly for a lender while a broker is an independent party that does not work for anyone but themselves and their clients. It is riskier using a mortgage broker versus a loan officer. So obviously if you're getting a loan, the first thing you're going to think is, you know, can I trust? I want to trust the financial institution I'm going to. Which financial institution do most people trust their bank most likely, right? Maybe not completely but possibly more than other people like holding on to their money. And so you would expect if you go to the bank and work with their, you know, the bland loan officer, the good old bland dependable loan officer, that that would be the most like well beaten path to getting the loan and having the least, you know, with less risk in the process. Obviously if you're going to multiple institutions, you're going a little bit more outside the box and the mortgage broker is looking into multiple institutions, which you may not have as much trust as in from the bank, but of course they might have more favorable terms depending on the circumstances that we're looking for. So is it riskier using a mortgage broker versus a loan officer? Why use a mortgage broker over a bank? Because mortgage brokers work with many lenders including major banks, small lenders, insurance and trust companies and private funds, they often have access to mortgages with better rates. So clearly if you're working with one financial institution, the loan officer at the one financial institution versus a mortgage broker comparing multiple institutions, you might be able to compare and contrast and get a better rate if you're able to compare and contrast the multiple institutions. So that would be the benefit of the broker who might have more capacity to do that. The bottom line in some ways a loan officer and mortgage broker perform similar roles, both will advise you as to what kind of mortgage loan is best for you and both will help you apply for a mortgage. There are important differences however, a loan officer works for a particular mortgage lender and can only offer loans from this company. A mortgage broker in contrast has access to a wide range of loan options, whichever professional you choose to work with, make sure you pay careful attention to the fees and commissions associated with your mortgage and shop around for the best deal. You will be paying your mortgage for a long time and it makes sense to get it right. So clearly this is one of those areas where what's the adage here? What's the adage? It's going to be measure twice, cut once. We're going to go through the process and think it through and not just trust our gut although we still like to look at the gut a little bit. I still trust my gut a bit but I'm going through the formal process here because I haven't trained my gut to trust my gut with the long-term decisions so we've got to go through the formal process.