Getting a New York City condo or co-op is such an ordeal that shellshocked buyers in need of financing are often happy to use whoever their real estate broker recommends, whether it’s a mortgage broker or a mortgage banker.
But there are pros and cons to using a mortgage broker that you should be aware of before you embark on your buying experience.
First, it’s helpful to understand the difference between working directly with a financial institution to get a loan for a co-op or condo unit and using a mortgage broker.
“A bank or credit union will give you rates and fees based on the products they offer and a buyer can apply directly with the bank or credit union. In this instance, you will work directly with the loan officer at that financial institution to find the best product that they have available for you,” says Brittney Baldwin, vice president and loan officer at National Cooperative Bank (a Brick Underground sponsor).
“A mortgage broker can assist you with finding products and services that fit your needs and typically works with a variety of financial institutions. Whether you go with a mortgage broker or work directly with a bank or credit union, make sure you are getting all the information to make an informed decision on your loan rates, fees, and terms,” she says.
If you’re a well-qualified buyer with a standard transaction—it won’t make too much of difference whether you turn to a mortgage broker or banker. But if your transaction is more complicated—a mortgage broker may give you the flexibility you need—with the exception of jumbo and new construction loans. Read on for more on the pros and cons of using a mortgage broker.
- Pro: Mortgage brokers have more flexibility on credit scores
- Pro: A mortgage broker is better for a challenging transaction
- Pro: NYC mortgage brokers are more likely to understand co-ops
- Con: Mortgage brokers are not the best source for jumbo loans
- Con: Mortgage brokers can’t compete with relationship pricing
- Con: Mortgage brokers are not your source for new construction loans
Pro: Mortgage brokers have more flexibility on credit scores
Because big banks have lots of financial products, mortgages being just one of them, they can shift their focus depending on economic conditions and interest rates. For example, Santander Bank announced last week that it is going to stop issuing new mortgages and home equity loans in the U.S.
Another example is JP Morgan Chase’s decision to tighten borrowing restrictions in response to the housing market slowdown in April 2020. As a result, applicants for new mortgages had to have a credit score of at least 700 and be required to make a down payment of 20 percent.
That move essentially said “no to 60 percent of the market” in part because “lending was getting scary,” explains Kevin Leibowitz, president and owner of Grayton Mortgage.
Sometimes when big banks tighten up rules—it can feel almost arbitrary, like when it comes to the rigidity of credit scores—just one point can make or break a deal.
“You can’t believe how many people get a store credit card for the discounts then forget to make payments. Now you’re 30 days late and your credit score has dropped,” Leibowitz says.
That’s what happened to a couple who forgot a payment to Macy’s, resulting in a 739-credit score for the wife. Leibowitz says Wells Fargo would not do their loan because they didn’t have a score of 740—despite the fact that both are big earners at high-profile jobs.
“Banks have ironclad rules,” he says, while on the other hand, “brokers have the ability to shop around.”
Pro: A mortgage broker is better for a challenging transaction
If you’re a buyer with solid financials, you have the option of going with either a mortgage broker or banker, says Alan Rosenbaum, CEO of GuardHill Financial Corp., which is a mortgage banker. However, for very challenging transactions—for example, buyers with low FICO scores, bad credit, a lack of liquidity or lack of income, a mortgage broker is better equipped to work with you, he says.
And that goes for foreign buyers too. “Most banks won’t do international buyers,” he says.
Buyers might be shocked at what banks reject, Rosenbaum says—for example a buyer who was looking to buy a condo on the 44th floor of a building. The condo didn’t have flood insurance, but to a mortgage specialist that was not an issue. (Flooding is not generally considered a problem when you have a unit located so high up, he points out. Go figure.)
Pro: NYC mortgage brokers are more likely to understand co-ops
In terms of ownership, co-ops are set up very differently from condos—they are structured as part of a corporation—so it’s important to work with a lender who understands and is comfortable with this type of housing—which represents roughly about three-quarters of sales apartments in NYC.
“When you work with a big bank, the loan officer may be here in NYC, but the underwriter may be located outside of NYC. And while they may have training in co-ops but they are likely more comfortable with single-family homes,” Rosenbaum says. “Co-ops are hard for companies not located in NYC to understand.”
He says you can think of both mortgage brokers and mortgage bankers as mortgage specialists. He draws a distinction between these mortgage specialists (which only do mortgages and refinancing) and the big “retail” banks—which offer many other financial products and may not have deep expertise in NYC housing.
That can give NYC-based mortgage specialists a hometown advantage.
“We live in co-ops ourselves,” Rosenbaum says—adding that someone based here will be more used to evaluating a co-op for a loan, for example checking to see whether there is ongoing litigation and what the ratio is of owners vs. investors.
“If an underwriter doesn’t understand something, it is easier to reject than it is to approve,” he says.
Con: Mortgage brokers are not the best source for jumbo loans
Jumbo loans—loans too big to qualify under guidelines set by Fannie Mae and Freddie Mac, the quasi-governmental entities that guarantee loans for banks—do not get sold on the secondary market. Instead, banks keep them on their balance sheets, and so mortgage brokers, which are not in business of owning loans, are not your best source for jumbo loans.
Many NYC buyers need jumbo loans in order to buy NYC’s pricey properties—but these loans are tougher to qualify for. Most banks require as much as six months of mortgage payments in your bank account, versus the typical two months’ worth for a conforming loan.
However the new conforming loan limit of $970,800 for high-cost areas in 2022 means more New Yorkers can take advantage of lower rates, smaller down payments, and greater ease of borrowing associated with conforming loans.
Con: Mortgage brokers can’t compete with relationship pricing
Sometimes the major banks will offer their customers a discount on a mortgage rate in exchange for depositing significant funds. Mortgage brokers don’t take deposits so they can’t offer this discount, called relationship pricing.
For example, in November 2021, Citibank offered customers who are considering buying a new place or refinancing the following special offer: Either $500 off closing costs or one-eighth of a percent off with balances of $50,000 in deposits and investment accounts. Buyers with balances of $2,000,000 in deposits and investment accounts could get five-eighths of a percent off.
Banks are willing to give you this discount and take a loss on the interest rate because you are building up the funds you have on deposit with them, Rosenbaum explains.
Con: Mortgage brokers are not your source for new construction loans
Unlike a bank, which can hold a loan on its balance sheet and then sell it later—mortgage brokers can’t offer loans for condos still under construction. It is difficult for a mortgage broker to do a loan until 50 percent of the building is sold, Leibowitz says.
He had a client that was looking to buy a condo in a newly built 300-unit building. Wells Fargo did the construction loan for the project and was also the preferred lender—and offered a discount on the mortgage rate—making the bank’s rate very attractive.