A mortgage broker "buys" loans from a variety of mortgage lenders at a wholesale cost, and sells the loan to another mortgage banker, receiving a commission on the sale.
A banker, gets a loan from your local bank. A banker usually, but not always, has their own money to lend out and makes a profit by collecting loan fees and the interest the customer pays on the loan, called servicing fees. However, most banks package up loans in packets of $1,000,000 dollars or more and sells them to the secondary market, making a commission on the sale. Why? What are interest rates right now, 7 or 8%? The stock market and mutual funds are averaging 15% returns or more. Why have millions of dollars tied up in low return investments?
No matter what people will tell you, your best deals usually are at a bank. I mean the same building where you get your checking and savings accounts, not a mortgage company with the same name as your local bank. This is because there aren't a lot of add-on fees and middlemen who touch your loan and get paid for it. Plus, these guys do a volume business and therefore can cut corners on costs. The employees generally don't get a commission, just an hourly rate, so they aren't looking for ways to charge you extra. (No, that doesn't happen, does it? Yeah, and I have a bridge to sell you, too.) They also may lend out their own money, making money through the servicing of a loan, not in charging origination fees.
One of the reasons that a bank is cheaper: Banks don't give out loans to anyone without 'A' credit, job stability, long-time residence and good income. If you fit their criteria, giving you a loan is practically automatic and follows the same procedure every single time, without extra work or effort on the part of the bank.
As we stated, the banks make money by processing a cookie cutter type of loan. If you don't fit the 'A' profile in job, credit, and income, forget it: why should the loan officer do any extra work if and not be paid for it? Your loan gets pitched in the reject pile automatically. It's not that you're not a good loan risk, but look at it from the loan officer's point of view.
In the banks that do pay commission, a loan may pay a flat $100 commission for every loan. Therefore, why would a loan officer work on a loan that takes the time of two easy loans? He/she would make $100 less for the same work. It's just common sense for them to pitch out a difficult loan.
And the banks that don't pay commission? Are you kidding? Why deal with the stress if you you can just stamp 'reject' on the file? Those rejected files? This is where the mortgage broker comes into play.
In the mortgage broker world, you usually pay higher fees/interest rate for getting your loan through. The sharp loan officer can take a look at your application and know in advance how much effort it will be to get your loan through the system. Not every broker handles difficult loans, most prefer handling 'A' clients. Again, it's easier, like the guys working in the banks: they'd rather make a lower commission for less hassle and go for volume.
So why would an 'A' client go to a broker? The reasons are numerous: clients may not have tried the bank, the broker actually has a better deal (it happens) , either in interest or fees, or their realtor recommends them. Usually the broker, if they're good and have been in the business a while, has a regular clientele consisting of real estate agents or referrals by past satisfied customers. Buying a house is very stressful; a competent, hand-holding professional may be a service worth paying for. Keep this is mind, it's one of the things you should consider for when shopping for a loan.