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Homebuyers could be forgiven for not understanding the difference between mortgage brokers and mortgage bankers. They both sell loans. Why choose one over the other?

Top ranked mortgage industry executives say the better that borrowers understand how mortgage lenders and brokers operate, and the better they understand their own credit characteristics, the more likely they will find a loan provider to satisfy both criteria.

Mortgage brokers play a pivotal, if often misunderstood, role in the borrowing process. Brokers track the continuously changing wholesale mortgage market, looking for loan terms that will benefit their clients, yes, but also loans that benefit their own businesses.

Brokers may, for instance, find a good loan for a borrower, but their primary objective is to make a profit off the transaction. If a borrower’s credit characteristics make him an ideal candidate for a loan that they can sell to the borrower at a profit,  the brokers may work especially hard to earn the borrower’s business.

On the other hand, the borrower’s credit might qualify him for a subprime (or high-interest) loan that the broker has little experience with, and little interest in selling. Or, the borrower’s application might require extra paperwork to shore up a weak credit or employment history.

Brokers will generally have access to a wider array of loan products than mortgage bankers, and so they will often be better able to serve such applicants. But if the applicant does not fit the broker’s typical portfolio, he may compete less vigorously for the borrower’s business, pricing the loan higher than other lenders with the time or willingness to serve such applicants.

Of course, the same is true for mortgage bankers, who in years past sold only loans funded directly by their financial institutions. But over the past decade mortgage banks and their loan officers have begun acting like brokers, selling loans on behalf of other institutions when their own products do not suit an applicant’s needs.

The more precisely borrowers know their circumstances and can define themselves for the broker or lender, the more efficient the process will be for everyone involved, Mr. Gumbinger said. “And it’ll also make it easier to spot a good deal.”

Some mortgage brokers simplify the process further, by guaranteeing their fees at the start of the process, but not exposing borrowers to surprise costs at the closing.

A Direct Lender funds their own loans, and charge only the bottomline necessary fees to complete the transaction. When homeowners utilize brokers the broker charges origination fees and their lender's fees with whom they've decided to place the financing through.

Also, the closing costs are not tax deductible when proceeding to finance through a mortgage broker, unlike dealing with a direct lender which allows you to increase the tax deduction for that year.

The problem in dealing with a broker is that most brokers view themselves as independent contractors, and as such their interests are not fully aligned with those of borrowers. The broker’s income on a transaction is the mark- up of the wholesale price quoted by the lender. The higher the price the broker can induce the borrower to pay, the larger the markup.

If you elect to shop on your own, you are exposed to all the booby traps that await the unwary in this market. Here are just a few:

*Loan prices are reset every day, so you can’t compare A’s price on Monday with B’s on Tuesday.

*Loan prices depend on the type of loan, loan features, type of property, purpose of loan, and more. Unless you specify them all, A may give you the price of a sedan and B the price of an SUV.

*Loan prices have at least three price dimensions (interest rate, fees expressed as a percent of the loan, and fees expressed in dollars). If you don’t take them all into account, you may not select the lowest overall price.

*brokers do not guarantee prices until they are locked, and some give "low-ball" quotes to snare the business. If you don’t know how to avoid phony price quotes, you may be snared.

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