Mortgage Broker or Bank - Direct Lender, Mortgage Brokers, Mortgage Loan Products
Differences Between Using a Mortgage Broker and a Bank
Last Updated: March 10, 2016
There was a time when most homebuyers obtained their mortgage loans through their local bank or their credit union. Today, there are a number of home-financing options available which make it hard for a first-time buyer to know which route to take. Knowing which lender is the right fit for you and your financial situation is imperative to be approved and getting a home loan. Which is right for you? Let's take a look at the difference between using a mortgage broker or using a bank (also called a direct lender) to secure your mortgage loan.
What is a Mortgage Broker?
A mortgage broker is a type of middleman who represents many lenders and all of their loan products. The broker's goal is to match the loan product that best meets your needs at the best possible price. Once your loan is approved, you will usually deal directly with the loan originator or their mortgage service provider.
What is a Bank or Direct Lender?
Banks, mortgage banks, and credit unions are all considered direct lenders. That means, employees of that institution review your application and make the decision on whether or not they are going to lend you the money to buy a house. Typically, the bank will eventually sell your loan on the secondary market after a few month of closing.
Benefits of Using a Bank or Direct Lender
No matter what people will tell you, your best deals usually found using a direct lender. This is because there aren't a lot of add-on fees and middlemen who touch your loan and get paid for it. Plus, these guys do a volume business and therefore can cut corners on costs. The employees generally don't get a commission, just an hourly rate, so they aren't looking for ways to charge you extra. They also may lend out their own money, making money through the servicing of a loan, not in charging origination fees.
One of the reasons that a bank is cheaper: Banks don't give out loans to anyone without 'A' credit, job stability, long-time residence and good income. If you fit their criteria, giving you a loan is practically automatic and follows the same procedure every single time, without extra work or effort on the part of the bank.
As we stated, the banks make money by processing a cookie cutter type of loan. If you don't fit the 'A' profile in job, credit, and income, forget it: why should the loan officer do any extra work if and not be paid for it? Your loan gets pitched in the reject pile automatically. It's not that you're not a good loan risk, but look at it from the loan officer's point of view.
Benefits of Using a Mortgage Broker
In the mortgage broker world, you usually pay higher fees/interest rate for getting your loan through. The sharp loan officer can take a look at your application and know in advance how much effort it will be to get your loan through the system. Not every broker handles difficult loans, most prefer handling 'A' clients. Again, it's easier, like the guys working in the banks: they'd rather make a lower commission for less hassle and go for volume.
So why would an 'A' client go to a broker? The reasons are numerous: clients may not have tried the bank, the broker actually has a better deal (it happens) , either in interest or fees, or their realtor recommends them. Usually the broker, if they're good and have been in the business a while, has a regular clientele consisting of real estate agents or referrals by past satisfied customers. Buying a house is very stressful; a competent, hand-holding professional may be a service worth paying for. Keep this is mind, it's one of the things you should consider for when shopping for a loan.
Risks of Using a Direct Lender
The only risk that comes to mind when dealing with a direct lender is the limited choice of products. Direct lenders only offer their own programs so if you don't fit into their criteria, you won't get a loan from them.
Risks of Using a Mortgage Broker
Some mortgage brokers attempt to increase their profits by writing in hidden costs into your loan. The best tip we can give you to avoid getting taken to the cleaners on closing costs is to know the loan process and ask a lot of questions about the fees and charges.
Which Lender is Right For You?
Here is a simple breakdown into what kind of borrower are you and what will be the best fit for your lending needs.
- Excellent credit, access to financial documents, long employment history - Bank or Mortgage Broker
- Self-employed, don't want to share data about income or assets - Mortgage Broker
- ARM shopper, relationship customer with many accounts at 1 institution - Bank
Tips for Working with Lenders
If you are still trying to figure out which lender fits your needs, here are some tips for finding and working with a lender.
- Get Recommendations - Ask friends and neighbors for suggestion, especially if they've recently obtained a loan.
- Check Credentials - Mortgage bankers are regulated by either your state's department of banking or division of real estate. Check with the agency to see if a lender is in good professional standing.
- Do Your Homework on Mortgage Loan Processes - Learn about typical mortgages and ask questions when something does not look right.