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The mortgage industry is full of individuals and companies helping people get access to financing for one of the biggest investments in 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 the loan and, if you do, hands over the check.
When a prospective homeowner is ready to shop around for a mortgage, they may decide to consult with a mortgage broker. This is a financial professional who 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 intermediaries, helping consumers comparison shop, bringing them a variety of quotes from different lenders at one time.
To do this, a mortgage broker sits down with their clients to assess their needs and financial situation. They gather important information and documents that lenders require from the borrower, including income, pay stubs, tax returns, details on assets and investments, and credit reports. This helps them evaluate how much a consumer can afford to borrow.
Once amassed, 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 loan money in certain areas, which ones offer a specific type of mortgage, and which welcome or avoid applications on loans for certain types of homes such as co-ops, condos, or multi-family homes. Mortgage brokers can also work with borrowers who have a hard time getting approved through direct lenders’ automated underwriting process due to recent bankruptcy, poor credit, or unsteady employment.
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 won’t have multiple hits to their credit reports since they only have to visit one person to secure the best loan possible.
When working with a mortgage broker, it is wise to run a quick comparison to see if the rates and fees that they are offering are truly competitive. There are several companies that allow you to transparently see their rates and fees in under five minutes without a credit check, provided you meet their loan criteria.
Mortgage brokers don’t advance loans but do 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 may be banks and other financial institutions. Some direct lenders are private companies that deal specifically with financing mortgage loans for the general public—many of which operate online. For instance, borrowers that use lenders like Quicken Loans and Loan Direct can complete and get their approvals online.
Many borrowers choose to go with a lender with whom they’ve already done business. Having a long-standing relationship may help secure a better—or bigger—loan amount, not to mention a better interest rate. The process of applying for a mortgage through a direct lender is the same as it is with a mortgage broker: providing documentation, filling out the application, and waiting for approval. A mortgage calculator can show you the impact of a better interest rate on your monthly payment.
Consumers cut out the middleman by going to a direct lender. Doing so may also make the loan process faster. Since the lender deals directly with the consumer, the two can communicate effectively with one another rather than having to rely on someone else to relay 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 have a backup if the first choice doesn’t come through. But there is a pitfall to choosing a direct lender. Skipping a mortgage broker may mean going through the application process with more than one direct lender. Shopping around like this can be tedious and time-consuming. It can also mean taking a hit to your credit score if you’re 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 can influence a broker’s advice and research. Like some commission-based financial planners, some brokers work mainly with—or are partial to—certain lenders, which could influence the choices that they offer you.
Direct lenders, on the other hand, are compensated through a variety of fees and charges. For instance, if a consumer goes directly to a lender, then 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 closing. Consumers can get a reasonable idea of how much they must pay the lender in the good faith estimate (GFE) that all lenders provide.
Consumers aren’t obligated in any way 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 may 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 may provide borrowers access to loans that they would otherwise not even hear about. 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 are still hesitant 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 high-risk mortgages or to borrow more than they really needed. But increased regulation and consumer protection laws make them a good alternative for consumers who want to have someone else do all the shopping and talking for them.
Investopedia’s best overall pick for direct mortgage lenders is Quicken Loans, better known as Rocket Mortgage. For those looking for a more modernized process, Better.com uses software that links to popular banks and tax prep software like TurboTax so you don’t have to track down tax returns and statements to upload. If you prefer to work with someone local over a national company, then your local bank or credit union is a great place to start.
Mortgage brokers tend to be more localized, so the best place to start your search is by asking friends, family, and your real estate agent for referrals. You can also submit an inquiry on a website like LendingTree, and brokers will contact you directly. If you prefer not to get dozens of calls from brokers, you can search for them directly through sites that aggregate local, independent mortgage brokers throughout the country. Some lender sites, such as Rocket Mortgage, also have a search engine that will connect you with local mortgage brokers.
You’ll have access to multiple lenders, which gives you a good idea of how multiple lenders will qualify you. This can give you more flexibility, especially if your circumstances mean that you don’t fit into a category typically recognized by lenders.
Fees might be one disadvantage to working with a broker. 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 being steered toward a more expensive loan because it comes with a higher commission for the broker.
Direct lenders can make funding decisions quickly since they control their own lending criteria. This allows them greater control over which customers get the funds that they’re seeking. Another advantage is that many large direct mortgage lenders are licensed nationwide, which means that 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.
For one, you must apply individually with each lender. When dealing with direct lenders, there are no brokers to assist in the tasks of gathering documents and assessing 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 overcome, then your loan application could be denied. If this happens, you’ll have to start a new application with a new lender.
While a mortgage broker is a one-stop shop for multiple options, their fees come from the lender, so it may be possible for well-qualified buyers to get better rates and fees by cutting out the middleman. Individuals who are less qualified buyers or are buying less traditional properties will have an easier time finding loans for which they can be approved by going through a mortgage broker than by going through individual direct lenders with generally stricter criteria for approval.
