When you’re going through the mortgage application process, you’re often introduced to terms that might be a bit confusing. For example, what’s a direct lender and how is that different than a mortgage broker? And how do you know who to go through when you’re ready to apply for a mortgage ?
A direct lender, also known as a mortgage lender, is able to make loans directly to you, while a mortgage broker gets a variety of quotes from various lenders so you can compare rates. A broker can’t actually lend you money, but can work with many lenders to determine your options.
So how do you know who to go through for the mortgage application process? The short answer: it’s up to you. While the two have the same goal of fitting you with the best possible mortgage option, they’re different in some fundamental ways. We’re here to break down the differences between a direct lender and mortgage broker and hopefully make your decision process a little easier.
What Is a Direct Lender?
To put it in the simplest terms, direct lenders are anyone that can offer you a mortgage. This includes private financial institutions, commercial banks and everything in between.
When you go through a direct lender, they take care of all the loan origination functions, such as:
To apply for a mortgage, you’d go through the lender directly.
Direct Lenders Versus Banks
It must be noted that there’s a considerable difference between a direct lender and a bank.
Direct lenders typically only offer mortgage-related services, while banks traditionally handle multiple types of loan services. This can make a direct lender more specialized when handling the mortgage process, compared to its bank counterpart.
Additionally, banks can often be unyielding when it comes to their guidelines and mortgage terms. For example, while direct mortgage lenders are typically flexible when working with a lower credit score , banks have more strict requirements with credit scores and may be unable to provide a loan.
There are a few benefits to this system compared to using a mortgage broker.
First, your direct lender may be better equipped to address any issues that might arise during the mortgage application process. You may experience better and (in most cases) faster results from talking to a lender directly.
Next, 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 isn’t licensed in. In this case, it may be easier to go with a direct lender.
When you make the choice to go through a direct lender, you’re responsible for applying individually and independently to each lender you’re comparing.
This can entail filling out multiple applications forms, verifying your income, credit report and credit worthiness, and conducting several phone calls that may make the process a little time-consuming (especially if you’re on a tight schedule).
Because each direct lender is different, you may also experience a variation between rates and terms.
What Is a Mortgage Broker?
While a direct lender can be an institution, a mortgage broker is an individual who gathers a variety of quotes from various lenders and then presents their findings to a home buyer for comparison. Consider them mortgage middlemen, acting as the communication between the home buyer and a lender or bank.
Some of the tasks of the mortgage broker include:
The most obvious benefit is the fact that you speak to just one person during the mortgage application process: your mortgage broker. Since mortgage brokers may represent several lending sources, they can act as the intermediary for all communication of lender options.
While a liaison may be helpful if you would rather shop around for different lenders, there may be some downsides to using a broker.
First, dealing with an intermediary can increase the time it takes to close your loan as well as have other drawbacks like higher fees and costs for processing the loan.
Which brings us to the second point. In order for a broker to make money, they have to charge more because they’re 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.
Much like loan officers from direct lending institutions, mortgage brokers make money when you choose a mortgage. However, unlike direct lenders, brokers require a final fee based on the mortgage you chose. In some cases, you can find a lender that’s willing to cover the mortgage broker’s fee. However, you’ll have to discuss this option with your potential direct lender.
Lastly, while some 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 this 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, it’s not usually significant enough to affect your monthly payment all that much.
Because brokers are intermediaries between you and direct lenders, it may take more time and be more costly to use a broker.
The Choice Is Yours
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. The important thing to take away is to get quotes from both lender and broker to determine rates and ultimately the route you want to take when it’s time to get a mortgage.
You can check out our rates by going online through Rocket Mortgage® by Quicken Loans® . If you’d rather get started over the phone, one of our Home Loan Experts would be happy to take your call at (888) 980-6716.
If you have any questions for us, feel free to leave them in the comments section below.
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