Cover story: How to choose banker or broker

Consumers interested in refinancing an existing mortgage or applying for a loan to buy a home face a variety of confusing decisions - such as whether to opt for a loan insured by the Federal Housing Administration (FHA) or a conventional loan, or a fixed-rate versus an adjustable-rate loan.

Before consumers delve into the details of home financing, however, they need to decide whether to work with a mortgage broker or a mortgage banker. Plenty of consumers do not understand the difference between these types of lenders and the impact their choice may have on their finances.

“A mortgage broker does not make loans,” says Howard Banker, executive director of the Fair Mortgage Collaborative (FMC), a nonprofit organization that identifies and certifies lenders that adhere to strict standards of fairness and safety. “A mortgage broker finds good loan products and then sells them to customers. Only a bank or credit union can actually lend money.”

Gibran Nicholas, chairman of the Certified Mortgage Planning Specialist (CMPS) Institute, an organization that trains and certifies both mortgage bankers and mortgage brokers, says that mortgage brokers function like independent insurance agents.

“An independent broker can place a customer with any company since he or she isn’t tied to just one institution,” says Mr. Nicholas. “A mortgage banker is limited to the products of the institution he or she works for.”

Mr. Nicholas says that while in the past consumers often preferred to work with a mortgage broker because of the wide variety of loan products available, changes in the mortgage industry mean that today’s brokers have similar offerings to bankers.

“There are pretty much only two ways to go with loans today, either an FHA-insured loan or a conventional loan,” says Mr. Nicholas.

Consumers can contact multiple lending institutions on their own to compare loan rates and terms, as well as check with their primary bank or credit union to see if special programs are available for customers.

Jim Pair, a certified mortgage consultant and president of the National Association of Mortgage Brokers (NAMB), says the main difference between brokers and bankers is that bankers can underwrite and fund loans.

“Mortgage brokers are independent contractors who can pick the loans with the best pricing to suit their customers,” says Mr. Pair. “Typically, because brokers often work by referral, they are extremely customer-service oriented and will develop personal relationships with their clients. The main reason to work with a mortgage broker is because of that personal relationship and the ability to offer a variety of loan products.”

While recognizing the consumer-oriented nature of mortgage brokers, Mr. Nicholas also says that there can be advantages to working directly with a mortgage banker.

“A bank can often underwrite your loan in-house, which means that sometimes they will have more control over the loan process than a mortgage broker,” says Mr. Nicholas.

Whether working with a broker or directly with a lender, it is important for consumers to understand that the “best deal” varies from person to person.

Typically, a loan with a lower interest rate will require additional upfront fees or “discount points” that may be unacceptable to some borrowers. Other borrowers may want to pay those fees or even opt for a shorter loan term in order to save money over the long run on interest payments. No single loan program is perfect for every customer.

One area of confusion for many consumers involves payment for loan services.

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