You’re ready to buy a house. But before you start mentally redecorating, you’ll need to get your finances in order and know the two main options for obtaining a home loan: direct lenders and mortgage brokers.
Direct lenders, which include banks and nonbank mortgage lenders, are the actual lenders of the loans. Mortgage brokers are the middlemen for a variety of lenders.
What Do Mortgage Brokers Do?
A mortgage broker has access to loans from a number of lenders. That means you would simply go through the mortgage application process with the broker, who would then provide you with multiple mortgage options intended to meet your needs.
If you’re approved, you’d then deal with the lender or loan officer directly.
Mortgage brokers are licensed and regulated. You’ll want to ensure that any broker you’re interested in working with is credentialed by checking the Nationwide Multistate Licensing System & Registry consumer access site. You can also check platforms like the Better Business Bureau and Yelp to see what past clients say, and it might be a good idea to interview more than one broker before choosing one.
Brokers are compensated with borrower-paid fees or lender-paid commissions. Borrower fees typically range from 1% to 2% of the total loan amount. Lender commissions to brokers may range from 0.50% to 2.75% of the total loan amount—but lenders typically pass these costs on to borrowers by building them into the cost of the loan.
So it’s important to discuss fee structure with a potential broker before applying for a home loan. Mortgage brokers are required to disclose all fees upfront, and each fee should be itemized.
Mortgage Broker Pros
Because they are able to offer a variety of quotes from different sources, brokers can be useful if you’re looking to quickly and easily compare mortgage options.
Loan brokers may be able to find more competitive mortgage rates than offered by direct lenders, and may be able to waive or reduce mortgage-related fees.
A broker could be useful if you have concerns like a slightly lower credit score or student loan debt.
Mortgage Broker Downsides
Brokers may have preferred lenders that don’t necessarily offer the best interest rate. And some lenders won’t work with brokers at all.
If paid by lender commission, a broker could be tempted to steer a borrower to a more expensive loan.
Some lenders may offer homebuyers the same rate and terms that they offer brokers, if not better.
Mortgage brokers may charge borrowers directly (the fee of 1% to 2% of the total loan amount).
What Do Direct Lenders Do?
A direct lender is the actual mortgage provider. That could be a traditional bank, an online mortgage lender, or a savings and loan association.
Direct Lender Pros
You’ll skip the broker fees, and you may get a better rate with lower closing costs.
A direct lender typically does all the loan processing, underwriting, and closing in-house.
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Using an online, non-bank lender can potentially expedite the application process. Nonbank mortgage lenders issued 68% of all mortgages originated in 2020, according to Inside Mortgage Finance, an industry research firm.
Direct Lender Cons
Comparing rates and terms on your own from a sample of lenders takes time.
You’re limited to the loan programs of the institutions where you decide to shop. A broker may be able to offer loans and rates that a traditional bank cannot.
OK, but What Works for My Situation?
Either a direct lender or a mortgage broker can provide you with viable home loan options. Before choosing, you can ask for quotes from both and compare.
Lender fees demand attention. After applying for a mortgage, you’ll want to look at the fees on Page 2 of your loan estimate form in the “loan costs” section.
Then, looking at the loan estimate from each lender you apply with, you can compare the interest rate, fees, and closing costs.
If you have credit issues or specific financial needs, a mortgage broker might be able to help find you a lender that meets your needs. And again, it can save on comparison-shopping time and energy.
But if you have an existing relationship with a financial institution and solid credit, want the home loan approval done more quickly, or want to save on fees, then going through that direct lender may be your preferred route.
Mortgage broker or direct lender: Which is best? The answer depends on individual needs and preferences. Both aim to turn a home shopper into a homeowner.
SoFi is an online direct lender that offers fixed-rate mortgages with competitive rates. Qualified buyers can put as little as 5% down.
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