Differentiating Direct Lenders from Brokers

[randfish]

Many borrowers interested in financing real estate (particularly in the less regulated commercial field) have a hard time finding direct lenders rather than brokers or referring parties claiming to be lenders (who then add points on to a deal).

What strategies do you use to find direct lenders for yourselves, your clients, friends, etc.? How do you identify the honesty of a financing party?

[mtgman]

Randfish,

This is an old post, but has not been replied and am unsure if you have had the question answered.

To be honest the only difference between lenders and brokers is basically a broker is a middle man. As far as points and fees brokers have to disclose all fees whereas lenders do not have to disclose most of their own fees. Its not really that they are not being charged they just do not have to show some on the HUD 1.
There are benefits to both parties. The major benefit to the Broker is the ability to shop the loan and find the best rate for the customers situation. Maybe he is self employeed, First Time Homebuyer living with mom, Just out of a BK any number of reasons that may cause a hard time with finding a direct lender and also knowing which lender may specialize with that type of borrower.
My page mortgage broker or mortgage lender may help answer questions.

I am both a lender and a broker so If I have a customer who can not fit in a program or we do not feel comfortable with the loan we can put it with a better product somewhere else. I am not trying to force a customer into our product as a lender that we may make more money on. I will broker it to get the best loan for the customer.

The bottom line with both you have to call a couple. Put two brokers and two lenders against each other and see who comes up with the best deal. Most all lenders charge 1% origination (here anyway) But I am sure there are unsrpulous parties who try to charge a lot more. Also, I notice Brokers and lenders do not put ALL the estimated charges on the GFE or under estimate, to make theirs look cheaper. I lose deals for this. The fact of the matter is it cost what it cost. The only fees where a broker has descretion is origination, processing and that is it. The rest is a guesstamite.

Hope this helps and I wasnt too long winded.

[randfish]

Thanks for the information, mtgman. I was asking more in regards to borrowers or brokers who are seeking to find direct lenders (those with money to loan themselves) rather than brokers and the strategies that can be used to identify and differentiate as many brokers especially in the commercial industry will pretend/lie and say they are lenders.

[smccurdy]

I must be confused as to what you are asking here as well randfish, because he seemed to have answered your question. Unless you are asking him where to find you a direct lender? If that is the case, do a search on the Internet, or even visit his website. He said he is a direct lender. He seems to have a good deal going too, because he's a direct lender that can also broker your loan out if he's unwilling to loan you the money.

Like he said though, there is no real difference between a direct lenders fees and those of a broker. Both make money either in the front, or on the back end. I for one only charge up front, but most charge on the back end as well. I of course will charge on the back end if I can't make 1% up front. My fees are also shown on the GFE far before closing, and my fees are exact. The lenders fees are "estimates" and can change any time leading up to the closing, and do not need to be disclosed until you receive your Final HUD Statement.

Here in Florida points do not need to be disclosed until closing & they must be on the HUD statement. That of course leaves you wide open for a huge lie, unless you are savvy enough to know what to look for, and be up front with your broker that you will be looking for those points. But if the broker can't make 1% up front, they have to make it up somewhere, so sometimes points are necessary, just not excessive points. Points = a somewhat higher interest rate, not any extra money out of your pocket now.

So unless the broker is someone trying to scam your money, there really isn't a bad side to a broker. A direct lender on the other hand limits you to only their loan programs, which may not be the best fit for your credit and employment situation. The direct lender will still charge you those fees, yet will not shop for your best interest. You may get a higher interest rate with a direct lender, because they want to make as much money off you as possible. A broker doesn't get paid anymore if your interest rate is higher, unless he is charging points. Again, tell your broker up front not to charge points, and that won't be an issue!

If these fees are a concern though, you should really look at what your Real Estate Agent is making off of the houses they list. Here in Florida the charge for fees on a listing averages 5% to 7% of the sale of the home, which is outrageous! The measly 1% charged by a broker is small potatoes, considering they are getting you the best rate for your loan and will save you money over the term of your loan, usually 30 years. Not only that, but a contract for a house is usually 2 pages, and not much work. The paperwork needed to do your loan takes an entire manila folder!

A realtor typically wants to sell you the biggest house too, because that's a higher commission! A mortgage broker doesn't have an option as to the price of the home, because they are not showing you homes, nor are they helping you find a home in any way. They simply tell you how much you qualify for and then you search for the price home you want up to that amount.

[randfish]

smc -

Very informative response - thanks much!

The problem comes when you shift from residential real estate loan brokers to commercial. Commercial brokers often mis-represent themselves as direct lenders, and with a direct commercial lender, they either can or can't fund the deal and typically only add 1-1.5 points as opposed to a broker who can add up to 4 or 5.

Anyways, I was asking about questions one could use to identify potential brokers masquerading as lenders.

I heard elsewhere recently that one strategy is to ask the "lender" how they are funded - direct lenders will tell you if they have institutional, investor, private funding, etc.

[smccurdy]

Ok... Now I understand your question. I really do not know how to answer that question, to be perfectly honest.

How exactly are they mis-representing themselves? Are they coming right out and claiming to be the lender? Are they making subtle comments that lead you to believe they are? What do you think they are getting out of a lie like this, vs. stating who they really are? I would think (as a mortgage broker myself) that claiming to be a lender has much more risk involved, than simply stating who he/she really is.

I'm sorry I can't help you here, but good luck! If I find the answer, I will surely post it!

[randfish]

SMC,
Yes, usually they claim that 'they' will fund the deal. We often press these individuals about this issue, stating that we get scammed a lot by brokers who claim to be lenders. This response usually gets a "Yes, we get that too", only to find out 4-6 weeks into a deal that they are, in fact, brokers, who now have points added onto the deal with yet another lender.

I have even witnessed deals where 3 brokers had referred to each other one after another and each received a point on a deal that ended up costing a borrower 6.5 points in total. If they had just known the phone number of the lender, they could have saved 2.5-3 points.

[west2nd]

Both direct lenders and brokers have their benefits and drawbacks. There are good and unscrupulous "direct" lenders and brokers. Don't get it into your head that simply dealing with a "direct" lender somehow will make the loan transaction more legitimate, less costly or more favorable to you. "Direct" lenders can (and will) take you to the cleaners if they can.

A good broker can actually make the process smoother for you and will be able to get you a much better term, rate and conditions than you may otherwise be able to negotiate for yourself. I would happlily pay a broker reasonable points in order to get the best possible deal. (Don't you expect to get paid for your ability to competently do the job you do?)

Quite frankly, 99% of all borrowers have no real idea of how to most effectively negotiate the BEST possible deal with a lender. Most lenders have SEVERAL financing options that they do not advertize. Unless you KNOW exactly what to ask for and HOW to ask for it, you will NEVER get the best possible deal (How can you, if you never know the possibility for a better deal exists, as well as how to negotiate to get it? --- A GOOD broker DOES)

As with anything dealing with financing, you need to be aware of your actual needs, financial position and personal/business qualifications in order to have some idea of what falls in the range of a good loan deal for you. It is unwise to assume that a broker is bad news simply because he or she expects to get paid commesurably for the services and expertise that they provide.

NEWSFLASH.....some of the best "direct" lenders will ONLY deal with BROKERS (didn't know THAT did you?)


Think now that you may want to talk to a good broker?

[smccurdy]

West2nd is 100% correct. Many of the lenders I use will not deal with borrowers 1-on-1.

I have a loan that I'm working on right now, where my client has been shopping me. No problem there, but he went to a direct lender in Ohio, or TN, or some place up North. Now, going with a lender he will be stuck to just their loan programs and Interest Rates, which may not suit him. But, he figured his closing costs would be cheaper than using me, since I'm going to charge a fee on top of the closing costs, so that I can get paid (I do not charge points on the back, unless I can't make 1 to 1.5% on the front). But man was he wrong!

He sent me his GFE and his closings costs came out to $300 less than mine... That's it!!! $300 less than mine on a $170,000 Loan!!!!! This Direct Lender had tacked on some bogus charge for processing that was nearly $1400, plus another processing fee that was another $900. Then they were going to charge him an appraisal fee, but he told them he already had an appraisal done!

My point is the same as West2nd's. Don't think that just because you found a lender that will work with you, and you think you've found a way around using a broker, that you've found the best deal. 1) You're stuck with that lenders Loan Programs 2) The lender may charge you the same amount in closing costs, but call the charges something different 3) Not all Brokers Charge Points 4) Brokers still cost MUCH less than any Realtors, who typically charges 6% to 7% to do not even half the amount of work that a Broker does.

If you find a Broker that is mis-representing him/herself, report them! You may have no proof to bring with you, but if enough people make the same claim against that broker, eventually the State will have to do something. Brokers like that make a bad name for the rest of us.

Again, good luck!

[randfish]

Guys,

Don't get me wrong, I'm not against brokers. We work with brokers every day. They bring us 90%+ of our business. It's just the guys who claim to be lenders that bother me - they're just making it hard for us to do business.

I was really hoping to find a good way to ask a few pointed questions and know for certain if the person I'm on the phone actually has millions of dollars to fund loans with or if they're a broker trying to tell me what they think I want to hear. I even understand why they're pretending to be direct lenders, but in our case, it really can't help - only hurt. And, I have to say that after talking to between 150 and 300 brokers/lenders over the last 9 months, I'd say that only 15-20% DID NOT try to say they were direct lenders when I first talked to them. The problem is rampant and I know they have good reason, but it really slows us down.

I had this happen again yesterday after being promised that the guy was a direct lender, I found out he sent a deal to another friend who does work for a direct lender and he called me up (as I had tried to send him the deal previously). It's just a mess...

SMC -

I do know that some lenders are equally slimy, but we're not - our points are listed on our website and they don't change unless there is extra risk in a deal and we confirm it beforehand with the broker/borrower. Believe me, I could start another thread entirely on a few of our 'direct lender' competitors.

Also, I'm talking about commercial loans (not residential), so 1% on our usual size deal is $10,000 or more. We have paid brokers up to $50,000 on several recent deals, so you can see why there is the incentive to fib a little (or a lot).