Dealing With Mortgage Loan Officers and Brokers

If you're shopping for a mortgage you will eventually find yourself dealing with a loan officer or mortgage broker. A loan officer works for a financial institution and helps applicants in the loan application process. A mortgage broker shops for the best deals at various lenders for you. Here's what you need to know about what they do and how you can make sure the mortgage offers they come up with are right for you.

What Is a Mortgage Loan Officer?

A mortgage loan officer is a representative of a bank, credit union, or other financial institution who assists borrowers in the application process. Most mortgage loan officers also work with individuals and small businesses on a variety of other loans.

Loan officers must have a comprehensive knowledge of lending products, as well as banking industry rules and regulations, and the documentation required for obtaining a loan.

Loan officers are paid either "on the front," "on the back," or some combination of the two. "On the front" refers to charges you can see, such as for processing your loan, often called settlement costs. You can pay these fees either out of pocket when you sign the papers or by incorporating them into the loan.

If a loan officer makes money "on the back," that means they're receiving a sort of commission from the bank for selling you the loan. This is a charge that you do not see. When a loan officer claims to be giving you a "no out-of-pocket" or "no-fee" loan, they are still making money but are charging it "on the back."

So isn’t that better for you? Not necessarily. Although the bank is paying the loan officer a commission, the money is really coming from you, the borrower, in the form of a higher annual percentage rate (APR) to make up for lost fees. In fact, the lending institution could be making a lot more money this way, as it stands to get a higher interest rate for what could be 30 years or more.

What Is a Mortgage Broker?

A mortgage broker serves as an intermediary between borrowers and lenders; they do not make loans themselves. If a loan is approved, the mortgage broker collects an origination fee from the lender as compensation.

For borrowers, the advantage of using a broker is that they can shop at different banks for the lowest rates, while loan officers can deal only with the rates offered by their institution, although they may have some negotiating room.

On the other hand, the advantage of using a loan officer is that you don't have to pay the broker's fee—which you can bet is eventually going to come out of your pocket, one way or another.

If a broker can find a lower rate and still offer the most advantageous loan—even after accounting for their fees—then they may be your best choice.

However, don't automatically assume that brokers will give you the best rates they can. They may be cozy with certain lenders or swayed by which lender offers them a larger commission. So, even if you plan to use a broker, there's no substitute for shopping around, comparing loans, and knowing the difference between a really good rate and a so-so one.

How to Compare Mortgage Loan Offers

When you apply for a loan, the lender must give you a loan estimate—a government-mandated form that details the terms of the mortgage it is offering you. That includes the amount, type, and term of the loan, as well as projected closing costs, your monthly payment, and the annual percentage rate.

You can ask for loan estimates from multiple lenders and compare their offers side by side. But note that loan estimates are typically valid for just 10 days, after which the terms may change. A mortgage calculator can be a good resource to see how different rates affect your monthly payment.

Tactics to Watch Out For

As mentioned above, mortgage brokers may not always come up with the best possible offer if it's not in their financial self-interest to do so.

Loan officers may have similar conflicts. Bear in mind that loan officers are essentially salespeople who get paid for selling you something—specifically, a loan. The loan that is best for you and the one that's most lucrative for them may be two different things.

For example, be wary if a loan officer seems to be trying to steer you into an adjustable-rate mortgage (ARM). ARMs can be a good choice for certain people, especially those who know they won't be in their homes for very long.

However, if you are planning to stay in your home for more than seven years or so, then an ARM may not be a very good choice, since the interest rate could dramatically increase over that period. A fixed-rate loan would be safer, even if it starts out with a higher interest rate.

Because it behooves loan officers to sell as many mortgages as possible, some may be tempted to steer you into an ARM with the idea of persuading you to refinance with a new loan in a year or two. If you find yourself in that situation before you take them up on the offer you'll want to find out:

1. How much lower is the interest rate on the new loan?
2. How much will you have to pay in out-of-pocket fees?
3. How long will it take you to recoup those costs under the new loan?

If you are getting a lower interest rate and don't have to pay any fees, refinancing could be a better deal than what you have now. Otherwise, make sure you do the math.

The Bottom Line

Either a loan officer or a mortgage broker can assist you in finding a mortgage. But to make sure you're getting a genuinely good deal, and the right kind of mortgage, you'll want to do some legwork yourself.

Fortunately, there are numerous mortgage sites online where you can compare rates and terms. With that background, collect loan estimates from the lenders you're thinking of dealing with and compare them directly. And if a mortgage broker can come up with a more attractive deal, all the better.