Why do I, as a consumer need to know this?
Well, simply put, company structure will dictate how much a mortgage loan purchase or refinance may cost you.
Below is a brief description of company types and how the structure they have can affect the pricing or cost of the interest rate you desire.
Company Types and Structures
The things that make up for this “pricing” or cost of the interest rate will differ between loan professionals, company structure, company margins are the 2 biggest differences in why pricing would or could be different between loan professionals offering the same product.
- Company Types or structure – retail lender, correspondent broker, wholesale lenders, mortgage broker.
Retail Lenders
is a financial company that offers loans directly to consumers(borrowers) through their own channels using their own money to fund loans offered to borrowers. These companies can be banks, credit unions, or specialized mortgage companies. They have multiple loan products in most cases. However, when a borrower works with a retail lender, they only get the offer(pricing) of that lender.
They offer to lend their own money, have higher over head in most cases, limited products and margins are normally higher.
Wholesale Lender
is a financial company that offers loans to consumers (borrowers) not directly but through a 3rd party known as a correspondent broker or mortgage broker. Wholesale lenders typically offer better rates and terms than retail lenders.
They use their own funds or lines of credit to fund loans through mortage brokerages or correspondent lenders. Wholesale lenders do not normally engage with consumers directly.
Correspondent brokers/lenders
are companies that offer loans from a wholesale lender however they will use their own line of credit or funds to fund the loan. Keeping the loan off the books of the wholesale lender directly, but to be purchased by the wholesale lender or service company. These companies can make more compensation as they are considered the lender.
They fund loans using their own funds or line of credit, can change their margins during a transaction to maximize loan benefits either for the borrower and or the company.
Mortgage Broker
is a company that is a 3rd party intermediary between borrowers and Lenders mainly wholesale lenders. The primary role is to compare multiple wholesale lender products with the loan scenario of the borrower based on the borrowers’ needs. Brokers are signed up with multiple wholesale lenders and can compare things like interest rate, loan terms, credit score and closing costs to offer the borrower the best option they can offer.
They have a set margin in compensation anywhere from 1% – 3.5%, They work as intermediaries for consumers with Wholesale Lenders. Most mortgage brokerages are somewhere around 2.5% in margin (compensation).
How Loan Companies are Paid:
Companies are either paid by the lender or by the borrower. This is known as lender paid comp or borrower paid comp. .
Lender Paid Compensation:
The loan company sets up a % of compensation determined by the loan amount $100,000.00 @ 2% compensation = $2000.00 commission or fee earned in securing the loan for the lender. This can also be a flat fee; however, I do not see that very often.
Borrower Paid Compensation:
is compensation paid by the borrower in a mortgage transaction that appears as a charge or cost as an origination fee or broker fee on the settlement statement and closing disclosure. Also, charged as a % of loan amount or a flat fee.
More about Company Compensation:
Compensation is different between company types – most companies are set up in margins between 2-5%
Correspondent brokers can charge an origination fee as borrower paid and receive some form of lender compensation as well since they are acting as the lender using the company line of credit. This compensation doesn’t have to be disclosed to the borrower.
Mortgage Brokers can only be paid compensation by the lender or the borrower, not both. In a borrower paid transaction the borrower may see a better interest rate as borrowers are normally not charged the same compensation % as the lender pays the loan broker. Additionally, mortgage brokers are not allowed to charge other fees commonly known as junk fees. They can charge for credit report and appraisal if needed. They can charge a processing fee if the company uses a 3rd party processing company. All compensation to a broker has to be disclosed to the borrower.
Broker compensation is regulated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and RESPA Real Estate Settlement Procedures Act.
Summary Opinion:
Retail lenders are very, very, expensive and limited options. If you try you will be able to find a better loan cost vs interest rate. You will know a lot of these big retail lenders as their names are all over the place and not hard to find.
Correspondent Brokers vs Brokers – It all depends on the margins and how they are set up to make commissions. This is where I think you want to be as a consumer as you can find more options and between companies some very good and consumer friendly loans from a cost standpoint. Ask about their margins, I am sure it will surprise the loan officer as this is never asked. Ask them questions about how they are paid and you will find better loans.
If you have any questions about the company you are working with, please reach out to us or call 888-976-7688.
Thank you,
Johnny
Johnny Neafus
Senior Loan Officer
16165 N. 83rd Ave. ste 200
Peoria, AZ 85382
Phone: 602.705.7586
Fax: 480.935.5954
[email protected]
www.InlineLending.com
NMLS885194
I have been in the mortgage/real estate for over 24 years. I have seen my fair share of the good, the bad and the ugly. I am a Mortgage Broker and hate to see consumers be uninformed and taken advantage of based on lack of knowledge or trusting the wrong person. I will share my opinion in hopes of helping consumers make strong and informed decisions.