When applying for a mortgage, how do you know whether to go to a mortgage broker or a direct lender? What’s the difference between the two and which is better? Well, the decision on which one to go to is ultimately up to you. Direct lenders and mortgage brokers have quite a bit in common, but they are also different in some fundamental ways.
Both brokers and direct lenders conduct marketing campaigns to attract clients. Both can gather information on your financial situation in order to determine whether to lend money to you. And both can help you better understand the mortgage process and clarify any legal disclosures to you. However, there are some basic differences between mortgage brokers and direct lenders that you should be aware of.
Number of Lending Sources
Mortgage brokers may represent several lending sources as opposed to direct lenders who are a single lending source. Brokers act as intermediaries between you and several lenders. While this may be helpful if you would rather shop around for different lenders through a “liaison,” there may be some downsides to using a broker. Dealing with an intermediary can increase the time it takes to close your loan as well as have other drawbacks, which you’ll understand as you read further.
Direct lenders are typically licensed to lend funds in all 50 states whereas brokers may only be licensed in a handful of states. This can become problematic if the property you’re buying is in a state the broker is not licensed in. In this case, it may be easier to go with a direct lender.
Mortgage Rates and Guidelines
Many people believe that mortgage brokers are able to offer lower rates than direct lenders. The truth is that all mortgage rates are based on what happens in the secondary market–basically that means every lender gets their rates from the same place. Therefore, interest rates may be just as competitive whether you go with a direct lender or a broker. Even if there is some difference in rates, say an eighth or a quarter of a percentage point, that’s not significant enough to affect your monthly payment all that much.
Plus, brokers are subject to the guidelines of the lenders they work with, so it may not necessarily be easier to go with a broker over a direct lender. In fact, a direct lender may be a bit more flexible since they are the ones who set their own guidelines–they may be able to waive certain guidelines at their discretion in order to gain your business. A broker cannot do this without permission from the lender.
All lenders must charge certain fees and costs for processing the loan. But in order for a broker to make money, they have to charge more because they are the ones doing the work for you. This means you’re paying the broker’s fees on top of the lender’s fees, so it may be more expensive to go with a broker. It’s akin to having to make an improvement or repair on your home–it’s going to be more expensive for you to hire a contractor than it would be for you to do it yourself because you’re not only paying for the materials, you’re paying for the labor.
Sub-Prime Mortgage Lending
The sub-prime market has suffered some heavy strains recently and considering that, it may or may not be better to work with a mortgage broker over a direct lender. The guidelines for sub-prime lending have become quite constricted, so if you’re looking for a mortgage and have bad credit, you may have problems finding a broker that can lend to you. Even some direct lenders who specialize in lending to people with less-than-perfect credit have either suffered seriously or have even shut down completely. There are many direct lenders available who do much more than sub-prime lending who are largely unaffected by the effects of the sub-prime market.
Many people choose to work with mortgage brokers and direct lenders alike, depending on their individual situation and needs. There are benefits to using either when applying for a mortgage. But because brokers are intermediaries between you and direct lenders, it may be more time-consuming and more costly for the reasons stated above. But having the facts will make it easier for you to make your decision.