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It’s one of the most important decisions you’ll make as a homebuyer: should you work with a mortgage broker or directly with a lender? There are a few key differences between the two, and unique pros and cons for each.
Rebecca Lake, a personal finance blogger at Boss Single Mama, has done both. Her conclusion? “Do your research.” Whether you choose a lender or a broker, “check out their track record,” Lake says. “Read reviews to see what other people are saying before you commit. And if a broker or lender seems off, then trust your instincts and look elsewhere.”
Here’s what you need to know in order to make the right choice for you.
Mortgage Broker Vs. Direct Lender: Key Differences
What Is a Mortgage Broker?
A mortgage broker is a matchmaker of sorts. He or she connects mortgage borrowers and mortgage lenders. A broker does not use their own money to originate mortgages. Instead, they will act as a liaison between you and your lender gathering the paperwork that will be needed for underwriting and approval.
What’s in it for the mortgage broker is they’ll get a commission from the lender, you, or both come closing day.
Key Considerations When Working With a Mortgage Broker
The primary advantage of a mortgage broker is to get help in navigating the complex landscape of banks and lending institutions. A broker likely has more knowledge of the mortgage landscape than someone merely shopping around for a mortgage.
Brokers are generally compensated through the loan origination fee. 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 he or she is disclosing potential conflicts of interest,” says Jonathan Howard, a certified financial planner with SeaCure Advisors.
There are other pluses. For one thing, mortgage brokers typically work with several lenders and can shop around for the best fit. That wide pool is important, says Christian Cruz, a real estate lawyer with WeOfferCashforProperties.com, “because it gives them flexibility to work with borrowers that don’t fit into a specific lender’s box, like perhaps you are not a W2 employee, are self employed, or your credit is less than stellar.”
Then there’s peace of mind. “They’ll accompany you on each 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 might be on the hook for a broker fee. “Many brokers charge home buyers 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 steering you towards a subpar lender simply because their broker commission will be higher,” says Leslie Tayne, an debt-settlement attorney with the Tayne Law Group.
While the broker works with multiple lenders, keep in mind that some lenders don’t work with brokers. “You could miss out on partnering with one of your top lenders as a result. It’s vital to research rates on your own beforehand,” says Tayne.
Mortgage Broker Pros and Cons
Access to multiple lenders
Gives you more flexibility, especially if you don’t fit into the typical lender “box”
Will have a good idea how multiple lenders will qualify you
Could have a higher interest rate and greater closing costs
Some lenders won’t work with brokers, so you could be miss out on partnering with certain lenders
Brokers often charge their fees directly to the homebuyer
What Is a Direct Lender?
A direct lender uses their own money to fund mortgages. Direct lenders include banks, credit unions, and major lending companies like Quicken Loans. When working with a direct lender, the loan officers, processors, underwriters, mortgage closers, and funders you interact with all work for the same company. Loan officers serve as the financial institution’s sales force. Commission is earned for originating loans, which means the prices charged may not be negotiable. Products available to the consumer are products offered by the direct lender or 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 skip broker fees and you won’t second guess whether your broker’s commission goals impacted their lender recommendations, points out Tayne.
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 funding your mortgage through them. Many lenders offer perks or rate discounts when you open more than one account with them.
Some direct lenders have “direct-only” deals that aren’t available if you go through a broker.
When working with a direct lender, your options are limited to the lender’s own products. “Say you go to a bank and they have only 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.
Know too, that if you don’t get approved by a lender and go to another lender seeking approval and don’t qualify, multiple credit inquiries can ding your credit score at a time when you most need a great score to get the best interest rate. WIth a broker, they should have a good idea of how you will qualify before running credit checks with a lender.
Direct Lender Pros and Cons
You may get a better rate and lower closing costs
Some banks have “direct-only” deals that aren’t available through a mortgage broker
You won’t pay broker fees
Limited to the institution’s lending programs
If you don’t fit into one of their programs, then you don’t have any options
If you’re not approved at one lender and go to another, multiple credit inquiries can hurt your credit score
When Each Type of Lender Makes Sense
Which option makes the most sense depends on your personal circumstances and goals, as well as how much work you want to put in yourself.
“If you do your research and find a good direct deal yourself, go for it,” says Guillelmina. “Also, some banks have ‘direct-only’ deals that would never be available through a mortgage broker.”
But time is a luxury 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,” Tayne suggests.
A mortgage broker, with their access to multiple lenders, might also be a good choice for those who don’t fit into the typical borrower profile, and might need access to more options in order to find a product that’s the right fit. These include non-W-2 borrowers, people who are self-employed, and those with less-than-stellar credit.
If you have an existing lender, pursue them first to see if you can use your relationship as leverage to get a discount. “No other company is likely to beat their offer,” he says.