Mortgage Broker Vs. Direct Lender: An Overview

If you’re in the market for a home and have found the perfect place, your next step is securing a mortgage. For many people, this is the stressful part. You have to get your finances in shape, review your credit report, and decide where to apply for a loan. Generally, your choice is between a mortgage broker and a direct lender.

  • A broker acts as an intermediary, helping you identify the best lender for your situation and pulling together all the information needed for the mortgage application.
  • A direct lender is just that: A bank or other financial institution that will decide whether you qualify for the loan and, if you do, will hand over the check.

Mortgage Brokers

A mortgage broker helps you comparison-shop. The broker will get a variety of quotes from various lenders and present them to you all at once.

Of course, you can and should do some online research into current rates. Many sites such as BankRateMonitor.com have regularly updated lists of mortgage rates coast to coast.

However, a really good mortgage broker should be able to bring more information to the table, such as which lenders loan money in your area, which ones offer a specific type of mortgage that may appeal to you, and which welcome or avoid applications on loans for certain types of homes such as co-ops, condos, or multi-family homes.

A broker is paid a fee based on the mortgage amount. You pay that fee unless the lender is willing to cover it.

Some lenders work exclusively with mortgage brokers, providing borrowers access to loans which they would otherwise not even hear about.

So, instead of applying to each lender separately, you have to deal with only one person, the broker, to find out what sort of loans you might qualify for. Once a selection is made, the broker will also work with you on your application.

The broker is paid a fee based on the mortgage amount, which can influence his advice and research. (You pay that fee unless the lender is willing to cover it.) Like some commission-based financial planners, some brokers work mainly with (or are partial to) certain lenders, which could inform the choices they offer you.

Mortgage brokers once had a dicey reputation. 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.

There are more protections in place now. That makes them a good alternative if you'd like an advisor or middleman to deal with lenders for you.

Direct Lenders

A direct lender is a financial institution that offers mortgages. Most are banks or savings and loan associations.

If you choose to go to a direct lender instead of a mortgage broker, you may apply to more than one lender. It's a bit like applying to college: Try the one with the best rate available, plus a backup if that doesn't come through.

You may get your best offer from a bank that you already have an account with or one that you've paid off a loan from in the past.

Going directly to lenders might be faster, since you'll be dealing directly with a bank as any questions come up, rather than through an intermediary.

Key Takeaways

A mortgage broker can help you identify the best lender for your situation and get the application through.

A direct lender is a financial institution that will decide whether or not you qualify for the loan.

If you don’t want the hassle of contacting various banks, a broker might be the better option.

If you have a banking relationship with a lender, that may be your best route.

Special Considerations

You don’t have to choose between mortgage brokers and direct lenders. You can call both mortgage brokers and direct lenders to compare their rates and then judge more fairly which route you want to go.

If you don’t want the hassle of contacting various banks, a broker might be the better option. If you already have a bank you have a good relationship with, that might be the way to go.