Bank vs. Broker
Profit is made when the loan moves from retail to wholesale. The mark-up or profit on a loan originated by a broker is made when the loan closes. This extra amount is on the settlement sheet and paid directly to the broker.
The mark-up/profit on a loan originated by a bank is made when the bank sells the loan to the secondary market. The mark-up/profit is the same for both the broker and bank. However, the broker has to disclose their mark-up/profit at the time of closing and the bank does not disclose their mark-up/profit because it is made after the loan has already closed.
For example, a broker originates a loan. At closing, the broker does not use his or her own money to make the loan. The wholesale lender will provide the funds to close. The broker has originated the loan at a rate that makes a certain mark-up/profit. The wholesale lender exactly knows how much mark-up/profit this loan creates when sold into the secondary market. The wholesale lender will pass a large percentage of their secondary market profit to the broker at the time of closing minus a small cut for themselves.
A bank-originated loan has the same mark-up/profit as broker originated loan. The bank will use it’s own funds to close the loan, pool it with other bank loans, and simply sell it into the secondary market making the mark-up/profit. No one knows about the extra profit except the bank.
Since you can only get a loan from the retail side, let’s talk more about brokers and banks.
Look at the pros and cons of each.
Banks (and those entities acting as banks)
Pro
- Convenience
- Less likely to use high pressure or bait and switch sales tactics
Con
- Bank-only products
- Limited number of products
- One rate take it or leave it
- Rate is much higher
- Less willing to negotiate on fees and other charges
- Exempted from disclosure rules as outlined in the Real Estate Settlement & Procedures Act (RESPA).
Brokers
Pro
- Access to wholesale rates
- Access to every product in the marketplace
- Customer service oriented
- Able to negotiate on fees
- Not exempted from the disclosure rule
Con
- Use high pressure bait and switch sales tactics
- Minimal and possibly no licensure required in many states
- More of a salesperson than consultant/banker
- No criminal background checks