It’s one of the most important decisions you’ll 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 advantages and disadvantages for each.
Rebecca Lake, personal finance blogger at Boss Single Mama, has done both. His conclusion? “Do your research.” Whether you choose a lender or a broker, “check their track record,” says Lake. “Read the reviews to see what others are saying before you commit. And if a broker or lender seems absent, then 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: main differences
What is a mortgage broker?
A mortgage broker is a kind of matchmaker. It connects mortgage borrowers and mortgage lenders. A broker does not use their own money to create mortgages. Instead, they’ll act as a liaison between you and your lender by putting together the documents needed for underwriting and approval.
What’s interesting for the mortgage broker is that they will receive a commission from the lender, you, or both on the day of closing.
Key Considerations When Working With A Mortgage Broker
The main benefit of a mortgage broker is getting help navigating the complex landscape of banks and lending institutions. A broker probably has a better understanding of the mortgage landscape than someone who is simply looking for a mortgage.
Brokers are generally remunerated by loan origination fees. Some brokers may have special compensation arrangements 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 thing, mortgage brokers usually work with multiple lenders and may research the best solution. This large pool is important, explains Christian Cruz, lawyer specializing in real estate at WeOfferCashforProperties.com, “because it gives them the possibility to work with borrowers who do not fall under the category of a specific lender, like maybe you are not an employee of W2, are self employed, or your credit is less than stellar.
Then there is the peace of mind. “They’ll be with you every step of the way, they’ll know what information is needed, help you avoid mistakes and save time,” says George Guillelmina, CEO of BestofBudgets.com.
In return for these benefits, however, you may have to pay brokerage fees. “Many brokers bill homebuyers directly, so be aware of the prices before partnering with a broker. If you find a broker paid by a lender, be sure to do your own research to prevent your broker from referring you to a lower lender just because their brokerage commission will be higher, ”says Leslie Tayne, Settlement Lawyer. debts to 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 major lenders. It is essential to research the rates on your own beforehand, ”says Tayne.
Advantages and disadvantages of the mortgage broker
Access to multiple lenders
Gives you more flexibility, especially if you don’t fit into the typical lender ‘box’
Get a good idea of how several lenders will qualify you
Could have a higher interest rate and higher closing costs
Some lenders won’t work with brokers, so you might miss a partnership with some lenders
Brokers often charge their fees directly to the buyer
What is a direct lender?
A direct lender uses their own money to finance mortgages. Direct lenders include banks, credit unions, and large loan companies like Quicken Loans. When working 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 earned for the original loans, which means that the prices charged may not be negotiable. The products made 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 being able to communicate directly with your loan officer to ask questions or make requests can be comforting. Without a middleman, you can ignore brokerage fees, and you won’t be able to guess whether your broker’s commission goals impacted their lender recommendations, Tayne points out.
If, during 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 benefits or rate reductions when you open more than one account with them.
Some direct lenders have “direct only” agreements that are not available if you go through a broker.
When working with a direct lender, your options are limited to the lender’s own 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, ”says Cruz.
Also be aware that if you do not get approval from a lender and go to another lender for approval and you do not qualify, multiple credit inquiries can affect your credit score. a time when 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 performing credit checks with a lender.
Advantages and disadvantages of the direct lender
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
Limited to institution loan programs
If you don’t fit into one of their programs, you don’t have any options
If you are not approved by one lender and move on to another, multiple credit checks can hurt your credit score
When every type of lender makes sense
The most logical option depends on your situation and personal 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. “Additionally, some banks have ‘direct only’ deals 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 option,” suggests Tayne.
A mortgage broker, with their access to multiple lenders, might also be a good choice for those who don’t fit the typical borrower profile and might need to access more options in order to find a product that’s right for them. . These include non-W-2 borrowers, self-employed people, and those with less than stellar credit.
If you have an existing lender, go after them first to see if you can use your relationship as leverage to get a discount. “No other company is likely to beat their bid,” he said.