Direct Lender vs. Mortgage Broker

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This is one of the most important decisions you will make as a home buyer: should you work with a mortgage broker or directly with a lender? There are a few key differences between the two, as well as unique pros and cons for each.

Rebecca Lake, personal finance blogger at Boss Single Mama, did both. His conclusion? “Do your research.” Whether you’re choosing a lender or a broker, “check their background,” Lake says. “Read reviews to see what others are saying before committing. And if a broker or lender seems off, trust your instincts and look elsewhere.

Here’s what you need to know to make the right choice for you.

Mortgage Broker Vs. Direct Lender: Key Differences

What is a Mortgage Broker?

A mortgage broker is a kind of matchmaker. He or she connects mortgage borrowers and mortgage lenders. A broker does not use his own money to create mortgages. Instead, they will act as a liaison between you and your lender in gathering the necessary documents for underwriting and approval.

What’s in it for the Mortgage Broker is that they will receive a commission from the lender, you or both on the closing day.

Key Considerations When Working With a Mortgage Broker

The primary benefit of a mortgage broker is getting help navigating the complex landscape of banks and lending institutions. A broker probably knows more about the mortgage landscape than someone just shopping around for a mortgage.

Brokers are usually compensated by loan origination fees. Some brokers may have special compensation agreements with banks and other direct lenders.

“For borrowers, it’s always a good idea to understand how the broker is compensated and to make sure they disclose potential conflicts of interest,” says Jonathan Howard, Certified Financial Planner at SeaCure Advisors.

There are other advantages. For one, mortgage brokers typically work with multiple lenders and can shop around to find the best fit. This large pool is important, says Christian Cruz, real estate attorney at WeOfferCashforProperties.com, “because it gives them the ability to work with borrowers who don’t fit into a specific lender’s box, like maybe you are not a W2 employee, are self-employed, or your credit is less than stellar.

Then there is peace of mind. “They’ll walk you through every step of the process, they know what information is needed, help you avoid mistakes and save time,” says George Guillelmina, CEO of BestofBudgets.com.

In exchange for these benefits, however, you may have to pay brokerage fees. “Many brokers bill homebuyers directly, so be aware of pricing before partnering with a broker. If you find a broker paid by a lender, be sure to do your own research to avoid your broker directing you to a lower quality lender just because their broker commission will be higher,” says Leslie Tayne, attorney in law. debt settlement with the Tayne law. Group.

Although the broker works with several lenders, keep in mind that some lenders do not work with brokers. “As a result, you might miss a partnership with one of your top lenders. It is essential to research the rates for yourself beforehand,” Tayne says.

Advantages and disadvantages of the mortgage broker

Benefits

  • Access to multiple lenders

  • Gives you more flexibility, especially if you don’t fit into the typical lender “box”

  • Will have a good idea of ​​how many lenders will qualify you

The inconvenients

  • Could have a higher interest rate and higher closing costs

  • Some lenders won’t work with brokers, so you might miss partnering with some lenders

  • Brokers often charge their fees directly to the buyer

Direct lenders

What is a direct lender?

A direct lender uses their own money to fund mortgages. Direct lenders include banks, credit unions, and large lending companies like Quicken Loans. When you work with a direct lender, the loan officers, processors, underwriters, mortgage brokers and lenders you interact with all work for the same company. Loan officers are the financial institution’s sales force. A commission is charged for original loans, which means prices charged may not be negotiable. The products available to the consumer are products offered by the direct lender or the bank.

Key considerations when working with a direct lender

The mortgage process can be complex and confusing, so it can be comforting to be able to communicate directly with your loan officer to ask questions or make requests. Without a middleman, you can avoid brokerage fees and you won’t have to guess whether your broker’s commission targets impacted their lender recommendations, Tayne points out.

If in your research you find that your current bank or credit union offers the best mortgage rates, find out if you can save more by financing your mortgage through them. Many lenders offer perks or rate reductions when you open more than one account with them.

Pro tip

Some direct lenders offer “direct only” offers that are not available if you go through a broker.

When working with a direct lender, your options are limited to the lender’s products. “Let’s say you go to a bank and they only have one program. If the criteria are rigid, and if you don’t meet the criteria, well, you’re out of luck. They won’t have anything else to offer you,” Cruz said.

Also be aware that if you are not approved by one lender and you go to another lender for approval and you do not qualify, multiple credit applications may affect your credit score at a time when you you need a good score the most to get the best interest. rate. With a broker, they should have a good idea of ​​how you will qualify before doing credit checks with a lender.

Advantages and disadvantages of direct lenders

Benefits

  • You can get a better rate and lower closing costs

  • Some banks have “direct only” offers that are not available through a mortgage broker

  • You will not pay brokerage fees

The inconvenients

  • Limited to institution loan programs

  • If you don’t fit into one of their programs, you have no options

  • If you are not approved by one lender and go to another, multiple credit applications can hurt your credit score.

When each type of lender makes sense

Which option makes the most sense depends on your personal situation and goals, as well as how much work you want to put in.

“If you do your research and find a good direct deal yourself, go for it,” says Guillelmina. “Also, some banks have ‘direct only’ offers that would never be available through a mortgage broker.”

But time is a luxury that not everyone has. “If you need someone to take care of your home buying needs while you focus on other priorities, a reputable mortgage broker might be your best bet,” suggests Tayne.

A mortgage broker, with its access to multiple lenders, might also be a good choice for those who don’t fit the typical borrower profile and might need access to more options in order to find a product that suits them. agrees. These include non-W-2 borrowers, the self-employed, and those with less than stellar credit.

If you have an existing lender, contact them first to see if you can leverage your relationship to get a discount. “No other company is likely to beat their bid,” he says.