Mortgage Broker vs. Direct Lender: An Overview

The mortgage industry is full of individuals and companies that help people get access to financing for one of the biggest investments in their lives. These entities include mortgage brokers and direct lenders. While they may provide services to people seeking mortgage loans, they are very different. A mortgage broker acts as an intermediary by helping consumers identify the best lender for their situation, while a direct lender is a bank or other financial institution that decides whether you qualify for the loan and, if you do, hands over the check.

Key Takeaways

  • A mortgage broker brings borrowers and mortgage lenders together by acting as a middleman between the two.
  • Direct lenders are financial institutions that approve and finance mortgage loans.
  • Brokers can help if you want to want to shop around without the hassle of contacting multiple lenders on your own.
  • A good place to start is a bank, especially if you have a good relationship with your financial institution.

Mortgage Broker

When a prospective homeowner is ready to shop around for a mortgage, they may decide to consult with a mortgage broker. This is a financial professional who brings borrowers and lenders together. They are not lenders and, as such, do not use their own funds to advance mortgage loans. Instead, they act as intermediaries, helping consumers comparison shop, bringing them a variety of quotes from different lenders at one time.

In order to do this, a mortgage broker sits down with their clients to assess their needs and financial situation. They gather important information and documents lenders require from the borrower including income, pay stubs, tax returns, details on assets and investments, as well as credit reports. This helps them evaluate how much a consumer can afford to borrow. Once amassed, they take this information to a bank or other lender for loan approval. Brokers are also responsible to communicate between borrowers and lenders during the application and approval process.

A good mortgage broker should be able to bring valuable information to the table, such as which lenders loan money in certain areas, which ones offer a specific type of mortgage, and which welcome or avoid applications on loans for certain types of homes such as co-ops, condos, or multi-family homes.

Mortgage brokers provide the convenience of being a one-stop-shop. This eliminates the need to visit multiple lenders to try to get the best rate and, ultimately, approval for a mortgage. And consumers won't have multiple hits to their credit reports since they only have to visit one person to secure the best loan possible.

Mortgage brokers don't advance loans but do provide a one-stop-shop with access to multiple lenders, while a direct lender is a single entity that cuts out the middleman.

Direct Lender

A direct lender is a financial institution or private entity that actually provides the loan for a mortgage. Direct lenders may be banks and other financial institutions. Some direct lenders are private companies that deal specifically with financing mortgage loans for the general public—many of which operate online. For instance, borrowers that use lenders like Qucken Loans and Loan Direct can complete and get their approvals online.

Many borrowers choose to go with a lender with whom they've already done business. Having a long-standing relationship may help secure a better—or bigger—loan amount, not to mention a better interest rate. The process of applying for a mortgage through a direct lender is the same as it is with a mortgage broker—providing documentation, filling out the application, and waiting for the approval.

Consumers cut out the middleman by going to a direct lender. Doing so may also make the loan process faster. Since the lender deals directly with the consumer, the two can communicate effectively with one another rather than having to rely on someone else to relay messages back and forth. So if a consumer has any questions during the application and/or approval process, they can go directly to the lender.

The goal is to find the direct lender with the best rate and have a backup if it doesn't come through. But there is a pitfall to choosing a direct lender. Skipping a mortgage broker may mean going through the application process with more than one direct lender. Shopping around like this can be tedious and time-consuming. It can also mean taking a hit to your credit score if you're applying with multiple lenders within a short period of time.

Key Differences

Compensation is one of the key differences between mortgage brokers and direct lenders. Mortgage brokers are paid on a fee-based schedule. In most cases, the loan origination fee charged by the bank is paid to the broker. This figure is based on the total amount of the loan, which can influence a broker's advice and research. 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.

Direct lenders, on the other hand, are compensated through a variety of fees and charges. For instance, if a consumer goes directly to a lender, that entity collects the loan origination fee. The lender also makes money off the interest earned on the principal balance, late fees, and other related charges that are required during closing. Consumers can get a reasonable idea of how much they must pay the lender in the Good Faith Estimate (GFE) all lenders provide.

Special Considerations

Consumers aren't obligated in any way to choose between mortgage brokers and direct lenders. In fact, they can call both to compare their rates and judge which route they want to take.

A bank may be a good place to start, especially for those who have a good relationship with their own financial institutions. For people who don't want the hassle of contacting different banks, mortgage brokers are a better option. As mentioned above, some lenders work exclusively with mortgage brokers and some brokers work exclusively with specific lenders. This may provide borrowers access to loans which they would otherwise not even hear about. But it's always a good idea to ask what their rationale is for suggesting a specific lender.

Mortgage brokers once had a dicey reputation, so it's no surprise that many people are still hesitant to use them. 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. But increased regulation and consumer protection laws make them a good alternative for consumers who want to have someone else do all the shopping and talking for them.