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 get your finances in shape: verify your income, go over your credit report and make sure everything points to you're being a worthy borrower. Then the next step is figuring out where to get a loan. You have two options: mortgage brokers and direct lenders. There are several differences between the two. Read below to learn about how to determine the best fit.
A direct lender is any financial institution that can offer a mortgage, including commercial banks with a slew of services and savings and loan associations, aka thrifts. If you choose to find a mortgage going through direct lenders instead of mortgage brokers, you have to apply individually to each lender. This might seem like a time-consuming hassle, especially since it often seems, nowadays, that there is little variation between rates and terms. But even a difference of 1% can make a huge difference in the life of your loan. (For more, see: "5 Secrets You Didn't Know About Mortgages.")
One of the benefits of direct lenders is that it’s easier to solve any issues that might come up. Your broker may not be able to answer all the questions that the lender might have, so you might get better results talking to a lender directly. Going through a direct lender may also be faster than using a broker. If you have several accounts with the same bank, they may offer better terms for one of their loyal and valuable customers. (For more, see "How Interest Rates Work on a Mortgage.")
The primary benefit of a mortgage broker is comparison-shopping: The broker can get a variety of quotes from different lenders and present them to you all at once. Instead of applying to each lender separately, you only have to speak with one mortgage broker to see what sort of loans you might qualify for. (For more, see "How to Get the Best Mortgage Rates.") Brokers also work with you on your application, streamlining the process.
Mortgage brokers used to have a dicey reputation. They were loosely regulated and, because their compensation was based on the nature and size of the loan, some were known for enticing borrowers to choose high-risk mortgages, or to borrow more than they really needed to. Now that there are more protections in place, however, they’re a good alternative, especially if you'd like an advisor or middleman to deal with lenders for you. Some lenders work exclusively with mortgage brokers, providing borrowers access to loans to which they otherwise would not have access.
Remember, however, the broker is paid a final 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.) And, 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. (For more, see "How to Pick the Right Online Mortgage Lender.")
The Bottom Line
You don’t have to choose between mortgage brokers and direct lenders. You can get quotes from both to see what is out there for you. If you call both mortgage brokers and direct lenders to compare their rates, you’ll be able to 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 that you have a good relationship with, that might be the better option. (For more, see "5 Mortgage Loans You Didn't Know About.")