Shop Retail, or Retain Agent to Shop Wholesale?
18 April 2005
"How do I know whether I am better off going to a mortgage broker or a lender?"
That question has no answer. The better question is whether you should shop the retail market yourself, or retain a broker as your agent to shop the wholesale market for you?
If you shop the retail market, it doesn’t matter whether the loan providers you shop are brokers or lenders. You are looking for the best deal, and it could come from either. The brokers you encounter when you shop the retail market are independent contractors. They receive wholesale prices from lenders which they mark up, offering retail prices to borrowers in competition with retail lenders.
If you retain a broker as your agent to shop for you, you will pay the agent for that service, but you will receive a wholesale price. Brokers who act as agents for borrowers, called Upfront Mortgage Brokers (UMBs), negotiate a fee for their services upfront, and pass through the best wholesale prices they can find.
Some people should shop for a mortgage, while others should retain a UMB to shop for them. The case for shopping is strongest for borrowers who enjoy haggling, who understand the market or are willing to learn, and whose loan is mostly "plain vanilla".
To help you make a decision, I have developed a little quiz. Give yourself the number of points shown at the front of the first statement if that statement describes you best, 0 points if the second statement describes you best, and average the two if you are in-between.
6. I like to bargain and have no hesitancy in speaking up if I think someone is trying to take advantage of me.
0. I avoid confrontation at all costs.
2. When significant money is at stake, I like to control things myself.
0. When significant money is at stake, I like to find someone I can trust to make critical decisions for me.
1. I feel very comfortable using a computer.
0. I am computer-phobic.
2. I know exactly what kind of mortgage I want.
0. I have no idea what kind of mortgage I want.
1. I understand why I must shop loan providers on the same day if the price quotes are to be meaningful.
0. I don’t understand that.
1. I know where to go for mortgage price quotations that shoppers can rely on, and which sources of price quotes are suspect.
0. I don’t understand that.
1. I understand when it is, and when it is not safe to rely on the APR in making comparisons between alternative deals.
0. I don’t understand that.
1. I understand why house purchasers should lock the price of a mortgage as soon as possible, and never allow the price to float with the market.
0. I don’t understand that.
1. I understand the features of a loan transaction that the loan provider might change even after the price is locked, and how to protect myself against that happening.
0. I don’t understand that.
5. I have the capacity to learn as much about mortgages as I will need to know to take care of myself in the marketplace, and I am prepared to make the investment.
0. I feel overwhelmed by the complexity of mortgages, and I don’t have the time, energy or desire to educate myself about them.
2. My credit rating is excellent.
0. My credit rating is poor.
2. I can fully document my income and assets.
0. I can’t document either.
2. I can make a down payment of at least 5%.
0. I can’t make a down payment or pay any settlement costs.
2. The total of my new monthly housing expense and my existing debt service payments are not likely to exceed 35% of my gross income.
0. They could exceed 45%.
1. My property is a single-family, detached home.
0. My property is multi-family, or co-op, or in a high-rise or non-warrantable condo, or in a planned unit development.
The maximum score is 30 points. If your score is 20 or higher, you are positioned to shop effectively for a mortgage. If your score is 10 or less, you should use a UMB to shop for you. If your score is in-between, think about it and then decide which way to go.
But do one or the other. If you contact only one loan provider who is not upfront, without shopping alternatives, you are likely to overpay – and especially if that one loan provider found you through a solicitation to which you responded.
"How do I know whether I am better off going to a mortgage broker or a lender?"
That question has no answer. The better question is whether you should shop the retail market yourself, or retain a broker as your agent to shop the wholesale market for you?
If you shop the retail market, it doesn’t matter whether the loan providers you shop are brokers or lenders. You are looking for the best deal, and it could come from either. The brokers you encounter when you shop the retail market are independent contractors. They receive wholesale prices from lenders which they mark up, offering retail prices to borrowers in competition with retail lenders.
If you retain a broker as your agent to shop for you, you will pay the agent for that service, but you will receive a wholesale price. Brokers who act as agents for borrowers, called Upfront Mortgage Brokers (UMBs), negotiate a fee for their services upfront, and pass through the best wholesale prices they can find.
Some people should shop for a mortgage, while others should retain a UMB to shop for them. The case for shopping is strongest for borrowers who enjoy haggling, who understand the market or are willing to learn, and whose loan is mostly "plain vanilla".
To help you make a decision, I have developed a little quiz. Give yourself the number of points shown at the front of the first statement if that statement describes you best, 0 points if the second statement describes you best, and average the two if you are in-between.
6. I like to bargain and have no hesitancy in speaking up if I think someone is trying to take advantage of me.
0. I avoid confrontation at all costs.
2. When significant money is at stake, I like to control things myself.
0. When significant money is at stake, I like to find someone I can trust to make critical decisions for me.
1. I feel very comfortable using a computer.
0. I am computer-phobic.
2. I know exactly what kind of mortgage I want.
0. I have no idea what kind of mortgage I want.
1. I understand why I must shop loan providers on the same day if the price quotes are to be meaningful.
0. I don’t understand that.
1. I know where to go for mortgage price quotations that shoppers can rely on, and which sources of price quotes are suspect.
0. I don’t understand that.
1. I understand when it is, and when it is not safe to rely on the APR in making comparisons between alternative deals.
0. I don’t understand that.
1. I understand why house purchasers should lock the price of a mortgage as soon as possible, and never allow the price to float with the market.
0. I don’t understand that.
1. I understand the features of a loan transaction that the loan provider might change even after the price is locked, and how to protect myself against that happening.
0. I don’t understand that.
5. I have the capacity to learn as much about mortgages as I will need to know to take care of myself in the marketplace, and I am prepared to make the investment.
0. I feel overwhelmed by the complexity of mortgages, and I don’t have the time, energy or desire to educate myself about them.
2. My credit rating is excellent.
0. My credit rating is poor.
2. I can fully document my income and assets.
0. I can’t document either.
2. I can make a down payment of at least 5%.
0. I can’t make a down payment or pay any settlement costs.
2. The total of my new monthly housing expense and my existing debt service payments are not likely to exceed 35% of my gross income.
0. They could exceed 45%.
1. My property is a single-family, detached home.
0. My property is multi-family, or co-op, or in a high-rise or non-warrantable condo, or in a planned unit development.
The maximum score is 30 points. If your score is 20 or higher, you are positioned to shop effectively for a mortgage. If your score is 10 or less, you should use a UMB to shop for you. If your score is in-between, think about it and then decide which way to go.
But do one or the other. If you contact only one loan provider who is not upfront, without shopping alternatives, you are likely to overpay – and especially if that one loan provider found you through a solicitation to which you responded.