If you’re in the process of buying a property, you might consider consulting either a mortgage broker or a direct lender. Many make the mistake of thinking these two are interchangeable, but it’s important to recognize a few key differences. Knowing these characteristics can help you make better choices when looking for financial loans.
A mortgage broker is a person who can connect you with various lenders and act as the middleman between the two parties. In other words, they bring borrowers and mortgage lenders together without utilizing their personal funds to establish the connection.
A mortgage broker collects the documents like proof of income, proof of employment, credit report, list of assets, and other useful details that determine your ability to secure financing from the lender.
How they help:
Mortgage brokers can save you time and effort because they often possess useful information regarding lenders, repayment terms, and added fees that might be hidden within a contract.
If you are a first-time borrower who needs help navigating the process of buying a property, a mortgage broker can help you navigate the complex process. When you work with a broker, they do the legwork and present quotes to you from different lenders so that you can easily evaluate your options.
Brokers tend to be well acquainted with lenders and trusted by them, which makes the process easier because some lenders prefer to work with known clients. Brokers can get you much better rates from lenders because they bring clients for the lender, which lenders reward with lower rates.
Types of loan services they can offer:
One of the biggest advantages of partnering up with mortgage brokers is that they give you access to information on multiple loan products, some of which might not be advertised to you elsewhere.
Whether you have a unique borrowing situation (e.g., having your own business), lackluster credit, or you’re just not seeing mortgages that work for you, a broker’s services can provide some potential loan options that perfectly meet your needs.
A direct lender is a private entity or financial institution that loans people money. For example, when you purchase a property—unless you’re paying for it in cash or using seller finance—you’ll likely have to take out a mortgage to help with the financing.
Unlike brokers, direct lenders are a type of mortgage lender that originates its loans. These lenders may use their private funds or borrow them from another source. For example, a bank is an example of a direct lender that originates loans.
How they get paid:
You will often pay direct lenders through origination fees between 0.5% and 1% of a loan’s total value. This compensation can come with mortgage payments or closing costs.
When you choose direct lenders, you also may have to pay for discount points, late fees, and other additional charges. It’s important to calculate the full costs of potential loans to see which ones are more affordable.
One straightforward way to assess the fees you need to pay a lender is to ask them for a Loan Estimate (LE).
Types of loan services they can offer:
During your initial application, the lender will inquire about your income, debt, credit score, and what property you’re looking to buy. With this information, they will pull your credit and determine the type of loan that suits you. These loan options include:
Keep in mind that each lender offers a different set of loans. You will need to understand the advantages of each loan type to make a decision.
If you’re in the process of choosing between a mortgage broker and a direct lender, their differences are fairly straightforward.
Many people make the mistake of thinking that cutting out the middlemen—mortgage brokers—and going directly to the lender is more cost-effective, but this isn’t the case. While mortgage brokers may have an origination expense, they can negotiate lender credits to offset the origination and—in some cases—also cover charges such as application and appraisal, saving you more money in the long run.
Mortgage brokers follow a more hands-on approach when it comes to serving their clients. They will help you navigate the buying process, handle the bulk of the paperwork, and communicate with your lender on your behalf.
The experience can widely vary for direct lenders, with some handling the heavy lifting and others doing the bare minimum.
We hope our guide better equips you and helps you find the best way to acquire funds. When you already have a lender, like a bank, in mind—one that you have a working relationship with or for which you’ve received a referral from a friend—it might benefit you to go to them directly. However, if you’re starting from scratch and feel overwhelmed by the sheer amount of lender and mortgage options, then a mortgage broker can help narrow down your choices, guide you through the process, and secure lower rates from lenders.
For over 15 years, our mortgage broker team at Cornerstone Capital Financial Services, LLC has helped thousands of people with their property acquisition. Now, it’s your turn. Get in touch with our friendly experts today by calling (201) 265-4545