Mortgage loans are made through both retail and wholesale channels. A retail loan comes from a lender that handles the whole process in-house. Wholesale loans are typically processed through brokers. The lender handles the nuts and bolts of the loan, while the broker works with you and prepares your application for approval
Wholesale loans start with a large lending institution that has a pool of money it wants to turn into home mortgages. They define the terms on which they're willing to lend it out, and send that information to mortgage brokers. The mortgage brokers then find customers, match them to the wholesale loan and work with them to close the loan. When the wholesale lender's pool of money is used up, it usually bundles the loans into securities and resells them on the secondary market to other investors. This refreshes its capital so it can go and make more loans.
How Brokers Get Paid
When a wholesale lender offers pools of mortgage money, it expects loan brokers to go out and find borrowers, take their applications, deal with any financial issues they have, and package them up for underwriting. In exchange for the work that the brokers do, they get paid through a fee called a yield spread premium. Brokers get paid for lending money to you at a higher rate than the wholesale lender. The higher your rate relative to the wholesale rate, the more the broker earns. This yield spread premium is in addition to the closing costs charged to customers for expenses like the closing agent's fee, title insurance or recording fees. However, some brokers will charge an even higher yield spread premium and absorb those costs themselves.
Retail / Direct Lenders
Retail or direct mortgages come from banks that do the entire transaction in-house. Typically, retail lenders are very large financial institutions that have big pools of capital, although some small banks will also make direct loans. Going to a retail lender won't necessarily save you money, though. Although retail lenders don't usually have a yield spread premium, they do charge origination fees to cover the expense of compensating their staffs, in addition to passing on closing costs similar to those charged on a wholesale loan.
Choosing a Loan
There is no absolute rule of thumb as to whether it'll be less expensive to take a direct loan or work with a broker that offers a marked-up wholesale loan. Frequently, a good broker can tap into competing lenders to find a better deal than you might find by going to a direct lender, but that won't always be the case. Ultimately, the best way to get a good deal is to shop brokers and direct lenders and compare the estimates they give you to see which loan is the least expensive.
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