Mortgage Broker vs. Direct Lender: Overview
The mortgage industry is full of individuals and businesses helping people gain access to financing for one of the biggest investments in their lives. These entities include mortgage brokers and direct lenders. While they may serve people seeking home loans, they are very different. A mortgage broker acts as an intermediary helping consumers identify the best lender for their situation, while a direct lender is a bank or other financial institution that decides whether you qualify for the loan and, if so, delivers the check to you.
- A mortgage broker brings together mortgage borrowers and lenders by acting as an intermediary between the two.
- Direct lenders are financial institutions that approve and finance home loans.
- Brokers can help if you want to shop around without the hassle of contacting multiple lenders on your own.
- A good place to start is a bank, especially if you have a good relationship with your financial institution.
When a prospective homeowner is ready to shop for a mortgage, they may decide to consult with a mortgage broker. This is a financial professional that brings borrowers and lenders together. They are not lenders and as such do not use their own funds to advance home loans. Instead, they act as intermediaries, helping consumers compare prices, providing them with a variety of quotes from different lenders at the same time.
To do this, a mortgage broker sits down with clients to assess their needs and financial situation. They collect important information and documents that lenders require of the borrower, including income, pay stubs, tax returns, asset and investment details, and credit reports. This helps them assess how much a consumer can afford to borrow.
Once accumulated, they take this information to a bank or other lender for loan approval. Brokers are also responsible for communicating between borrowers and lenders during the application and approval process.
A good mortgage broker should be able to provide valuable information, such as which lenders are lending money in certain areas, which ones offer a specific type of mortgage, and which ones accept or avoid loan applications for certain types of homes such as -ops, condos, or multi-family homes.
Mortgage brokers provide the convenience of being a one-stop shop. This eliminates the need to visit multiple lenders to try to get the best rate and ultimately approval for a mortgage. And consumers will not have multiple accesses to their credit reports, since they only have to visit one person to get the best loan possible.
Mortgage brokers do not advance loans, but provide a one-stop shop with access to multiple lenders, while a direct lender is a single entity that cuts out the middleman.
A direct lender is a financial institution or private entity that actually provides the loan for a mortgage. Direct lenders can be banks and other financial institutions. Some direct lenders are private companies that deal specifically with financing home loans for the general public, many of which operate online. For example, borrowers using lenders such as Quicken Loans and Loan Direct can complete and obtain their approvals online.
Many borrowers choose to go to a lender with whom they have already done business. Having a long-lasting relationship can help secure a better or higher loan amount, not to mention a better interest rate. The process of applying for a mortgage through a direct lender is the same as with a mortgage broker: providing documentation, completing the application, and waiting for approval.
Consumers cut out the middle man by going to a direct lender. Doing so can also speed up the loan process. Since the lender deals directly with the consumer, the two can effectively communicate with each other rather than having to rely on another person to get messages back and forth. So if a consumer has any questions during the application and / or approval process, they can go directly to the lender.
The goal is to find the direct lender with the best rate and to have a backing if it does not arrive. But there is a danger in choosing a direct lender. Skipping a mortgage broker may mean going through the application process with more than one direct lender. Shopping this way can be tedious and time consuming. It can also mean affecting your credit score if you apply with multiple lenders in a short period of time.
Compensation is one of the key differences between mortgage brokers and direct lenders. Mortgage brokers are paid on a fee schedule. In most cases, the loan origination fee charged by the bank is paid to the broker.
This figure is based on the total loan amount, which can influence a broker’s advice and research. Like some commission-based financial planners, some brokers work primarily with certain lenders (or are biased), which could inform the options they offer you.
Direct lenders, on the other hand, are compensated through a variety of fees and charges. For example, if a consumer goes directly to a lender, that entity charges the loan origination fee. The lender also makes money from interest earned on the principal balance, late fees, and other related fees that are required during closing. Consumers can get a reasonable idea of how much they should pay the lender in the Good Faith Estimate (GFE) that all lenders provide.
Consumers are in no way obligated to choose between mortgage brokers and direct lenders. In fact, they can call both to compare their rates and judge which route they want to take.
A bank can be a good place to start, especially for those who have a good relationship with their own financial institutions. For people who don’t want the hassle of contacting different banks, mortgage brokers are a better option. As mentioned above, some lenders work exclusively with mortgage brokers and some brokers work exclusively with specific lenders.
This can provide borrowers access to loans that they might not even know about otherwise. But it’s always a good idea to ask what the rationale is for suggesting a specific lender.
Mortgage brokers once had a risky reputation, so it’s no wonder that many people continue to hesitate to use them. They were loosely regulated and their compensation was based on the nature and size of the loan. Some persuaded borrowers to choose subprime mortgages or to borrow more than they actually needed. But more regulation and consumer protection laws make them a good alternative for consumers who want someone else to do all the shopping and speak for them.
Mortgage Brokers and Direct Lenders FAQs
What are the advantages of working with a mortgage broker?
You will have access to multiple lenders, giving you a good idea of how various lenders will rate you. This can give you more flexibility, especially if your circumstances mean that you don’t fit into a category typically recognized by lenders.
What are the downsides of working with a mortgage broker?
Fees can be a disadvantage of working with a broker. Some mortgage brokers charge the buyer a fee. In cases where the lender covers the fee, it is important to ensure that you are not directed to a more expensive loan because it carries a higher commission for the broker.
What are the advantages of working with a direct lender?
Direct lenders can make financing decisions quickly by controlling their own loan criteria. This allows them more control over which clients get the funds they seek. Another advantage is that many large direct mortgage lenders are licensed throughout the country, which means they can help buyers from any state. When a borrower is looking to buy a home in another state, direct lenders can be a great source of help.
What are the disadvantages of working with a direct lender?
For one thing, you need to apply individually with each lender. When it comes to direct lenders, there are no brokers to help you with the tasks of gathering documents and evaluating your financial status.
Another drawback is the approval of your application. Direct lenders have their own underwriting and loan terms. If there are problems with your application that they cannot resolve, your loan application may be denied. If this happens, you will have to start over with a new application with a new lender.