Mortgage Brokers vs. Direct Lenders: An Overview
The mortgage industry is full of individuals and companies that help people gain access to financing for one of the biggest investments of their lives. These entities include mortgage brokers and direct lenders. While they may provide services to people seeking mortgage loans, they are very different. A mortgage broker acts as an intermediary by 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 a loan. And if you hand over the cheque.
- A mortgage broker brings borrowers and mortgage lenders together by acting as an intermediary between the two.
- Direct lenders are financial institutions that approve and finance mortgage loans.
- Brokers can help if you want to make purchases on your own without the hassle of approaching multiple lenders.
- A good place to start is a bank, especially if you have a good relationship with your financial institution.
When a potential homeowner is ready to shop for a mortgage, they may decide to consult a mortgage broker. It is a financial professional that brings together borrowers and lenders. They are not lenders and, as such, do not use their own funds to advance mortgage loans. Instead, they act as middlemen, helping consumers compare shop, bringing them a variety of quotes from different lenders at a time.
To do this, a mortgage broker sits down with its clients to assess their needs and financial situation. They gather important information and documents that lenders require from a borrower, including income, pay stubs, tax returns, details on assets and investments, as well as credit reports. This helps them to evaluate how much a consumer can borrow.
Once submitted, 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 bring valuable information to the table, such as which lenders lend money in certain areas, which ones offer a specific type of mortgage, and which on loans for certain types of homes. Welcoming or avoiding applications. -Ops, condos, or multi-family homes.
Mortgage brokers offer 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 won’t have as many hits on their credit reports because they only have to go to one person to get the best possible loan.
Mortgage brokers do not offer advance loans, but provide a one-stop-shop with access to multiple lenders, whereas 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 a loan for a mortgage. Direct lenders can be banks and other financial institutions. Some direct lenders are private companies specifically concerned with financing mortgage loans for the general public – many of which operate online. For example, borrowers who use lenders such as Quicken Loans and Loan Direct can complete and receive their approval online.
Many borrowers choose to go with a lender they have already done business with. Having a long-term relationship can help in securing a better or larger loan amount, not to mention a better interest rate. The process for applying for a mortgage through a direct lender is the same as with a mortgage broker — providing documents, filling out the application, and waiting for approval.
Consumers cut out the middleman by going directly to the lender. Doing this can also speed up the loan process. Since the lender deals directly with the consumer, the two can communicate effectively with each other rather than relying on someone else to pass messages back and forth. So if a consumer has any queries during the application and/or approval process, they can approach the lender directly.
The goal is to find the direct lender with the best rate and back up if it doesn’t come through. But there is a problem in choosing a direct lender. Leaving a mortgage broker can mean going through the application process with more than one direct lender. Shopping like this can be tedious and time-consuming. It can also mean that your credit score may suffer if you are applying with multiple lenders within 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-based schedule. In most cases, the loan origination fee charged by the bank is paid to the broker.
This figure is based on the total amount of the loan, which may affect the broker’s advice and research. Like some commission-based financial planners, some brokers work primarily or partly with certain lenders, which can 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 the lender, that entity collects the loan origination fee. The lender also makes money off the interest earned on the principal balance, late fees, and other related charges that are required during the closing. Consumers can have a fair idea of how much they will have to pay to the lender in the Good Faith Estimate (GFE) provided by all lenders.
Consumers are in no way obligated to choose between mortgage brokers and direct lenders. In fact, they can call the two to compare their rates and decide which route they want to take.
A bank can be a good place to start, especially for those who have good relationships with their own financial institutions. For those who don’t want the hassle of approaching 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.
It can give borrowers access to loans they might not have heard of otherwise. But it’s always a good idea to ask what their rationale is for suggesting a specific lender.
Mortgage brokers once had a dicey reputation, so it’s no surprise that many people still hesitate to use them. They were loosely regulated and their compensation was based on the nature and size of the loan. Some persuade borrowers to choose higher-risk mortgages or to borrow more than they actually need. But increased regulation and consumer protection laws make them a good option for consumers who want someone else to shop and speak for them.
Mortgage Brokers and Direct Lender FAQs
What are the benefits of working with a mortgage broker?
You’ll have access to multiple lenders, which gives you a good idea of how many lenders will qualify you. This can give you more flexibility, especially if your circumstances mean you don’t fit into the category typically recognized by lenders.
What are the cons of working with a mortgage broker?
Fees for working with a broker can be a disadvantage. Some mortgage brokers charge a fee to the buyer. In cases where the lender covers the fee, it is important to ensure that you are not tipped towards a more expensive loan as it comes with a higher commission for the broker.
What are the benefits of working with a direct lender?
Direct lenders can make funding decisions faster because they control their own lending parameters. This gives them more control over how customers get the money they want. Another advantage is that many large direct mortgage lenders are licensed nationwide, which means they can help buyers from any state. When a borrower wants to buy a house in another state, the direct lender…