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If you’re in the market for a mortgage, you may wonder whether you should work with a mortgage broker or direct lender. Since both options have their own unique benefits and drawbacks, it’s important to understand how they differ. This way you can make an informed decision for your unique situation and goals. Below, we’ll dive deeper into mortgage brokers vs. direct lenders and go over the pros and cons of each one.
Understanding direct lenders and mortgage brokers
While direct lenders and mortgage brokers can both help you obtain a mortgage, they’re not the same. In fact, there are noteworthy differences between these options. Here’s a look at how they compare.
Direct lenders
Direct lenders are mortgage companies or financial institutions like banks, credit unions, or online lenders that offer mortgages directly to borrowers without a middleman. Each direct lender has their own loan products and terms, as well as if they offer discount points (or mortgage points), eligibility requirements, and underwriting protocols.
If you choose a direct lender, you can expect them to fund your loan as they’re responsible for the your mortgage process. You’ll communicate directly with a direct lender and their representatives, loan officers, or underwriters from the start of the mortgage process, all the way to closing. Since direct lenders have complete control of the loan process, they often offer quicker approval times.
Mortgage brokers
Mortgage brokers are middlemen between prospective borrowers and lenders, which may be banks, credit unions, and mortgage companies. You can think of them as intermediaries who will work with several sources to help you zero in on the right loan for your budget and needs.
Whether you’re looking for a conventional mortgage, a government-backed mortgage like an FHA, VA, or USDA loan, or a specialized mortgage such as a jumbo mortgage loan, a broker may come in handy. They’ll make it easy to compare rates, terms, fees, and other aspects of different mortgages
If you go the mortgage broker route, you’ll keep in touch with them throughout the entire mortgage process and they’ll make sure you receive the right information from the lender. They’ll be there to answer any questions and help avoid confusion as you apply for and close on your loan. Note that you may owe the broker fees in exchange for their services.
Pros and cons of direct lenders
The benefits and drawbacks of direct lenders include:
Pros:
- Streamlined process: You’ll communicate with a direct lender rather than going through a middleman or third party. This can allow for a smoother, more efficient experience because everything will be handled in one place.
Consistency: With a direct lender, you don’t have to worry about differences in policies and procedures. Since you’ll work with the company that will approve and originate the loan directly, you can enjoy consistency.
- Relationship building: If you choose a direct lender, you may build a long-term relationship with them. A strong relationship can make it easier to obtain financing with lower rates and favorable terms down the road.
Cons:
- Limited options: When you work with a direct lender, you only have access to the mortgages they offer. You might not be able to take out a specialized mortgage if the lender doesn’t offer it, for example. However, you can compare different direct lenders to determine if one meets your mortgage needs better than another.
- Rate and fee variability: If you only use one direct lender, you may have to settle for less competitive interest rates than you would if you compare terms from several direct lenders. This can potentially cost you hundreds or even thousands of extra dollars in interest over the term of the loan.
- Service levels: If you go with a larger direct lender, you might receive less personalized customer service. This may be a huge drawback if you’re new to the mortgage process or are looking for some extra guidance.
Pros and cons of mortgage brokers
Here’s a look at the advantages and disadvantages of mortgage brokers.
Pros:
- Access to options: Mortgage brokers have access to many lenders who can potentially offer a wider selection of loan products with more competitive rates and terms. You might learn about a great loan program that you may not discover with a direct lender.
- Negotiation power: Since a mortgage broker usually has relationships with different lenders, they might be able to negotiate better rates and terms on your behalf. A lower rate can lead to significant savings over the life of your loan.
- Convenience: A mortgage broker can handle paperwork and negotiations for you, saving you time and hassle. Convenience can be a big perk, especially if you lead a busy lifestyle or want a more hands-off approach to the mortgage process.
Cons:
- Broker fees: Most brokers charge broker fees, which can increase the cost of your loan. While fees vary by broker, anywhere between 0.50% to 2.75% of your loan principal is fairly common.
- Lack of direct control: You’ll depend on brokers for communication with lenders, which can lead to delays or misunderstandings. You may not have the high-level control you’d get if you went through the process on your own with a direct lender.
- Quality varies: Not all brokers are created equal. You may end up with a broker with access to fewer mortgage options or less efficient processes.
When to choose a direct lender vs. mortgage broker
Direct lenders and mortgage brokers can both be useful if you’re looking for a mortgage. However, there are some situations in which a direct lender makes more sense and vice versa.
Direct lender
You’d likely be better off with a direct lender if you prefer a simpler, straightforward mortgage process. This is particularly true if you already have a strong relationship with a bank, credit union, or other lender that offers a mortgage that meets your needs.
A direct lender may also be worthwhile if you have good to excellent credit and won’t have trouble qualifying for competitive rates.
In addition, a direct lender is your best bet if you’d like to be more involved and have more control of the mortgage process.
Mortgage broker
A mortgage broker can be beneficial if you’d like access to a larger range of loan options and competitive rates but don’t want to do the research and outreach yourself.
Also, if you have a unique financial situation because you’re self-employed or interested in a high-value home, for example, a mortgage broker may give you access to specialized mortgage products that are tailored to your situation.
In addition, a mortgage broker is worth exploring if you don’t have the best credit and want to ensure you land at the best rate and terms for your situation.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.