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Mortgage Brokers And Direct Lenders: Which is Best?
The vast majority of U.S. mortgage lenders are mortgage bankers, who don't lend their own money but borrow funds at short-term rates from warehouse lenders to cover the mortgages they issue. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most mortgages issued in the United States.
In addition to direct lenders, there are retail lenders, mortgage brokers, portfolio lenders, correspondent lenders, wholesale lenders and others. These are not necessarily mutually exclusive - there is a fair amount of overlap among the various categories. For instance, most portfolio lenders tend to be direct lenders as well. And many lenders are involved in more than one type of lending - such as a large bank that has both wholesale and retail lending operations.
One of the most confusing parts of the mortgage process can be figuring out all the different kinds of lenders that deal in home loans and refinancing. A good place to start with is the difference between direct mortgage lenders and mortgage brokers.
A direct lender is simply a bank or lender that works directly with a homeowner instead of a middleman or broker. Mortgage bankers and portfolio lenders usually fall under this category if they have retail operations. Examples include Wells Fargo and Bank of America, though smaller entities could share this distinction as well.
Direct lenders actually make the loan and provide the money used to buy a home or refinance an existing mortgage. They have certain criteria you have to meet in terms of creditworthiness and financial resources in order to qualify for a loan and set their mortgage interest rates and other loan terms accordingly.
One of the benefits of direct lenders is that it’s easier to solve any issues that might come up directly. Your broker may not be able to answer all the questions that the lender might have, so you might get better results talking to the 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 the best rates for being a loyal and valuable customer.
However, if you choose to find a mortgage going through direct lenders instead of mortgage brokers, you have to apply individually to each lender. This can make the process too time-consuming for some busy customers and it may affect your credit score due to the inquiries, depending on the time-frame in which you apply. Nowadays there is little variation between rates and terms so it might seem like a hassle to consult with a number of lenders. But even a difference of 1% can make a huge difference in the life of your loan.
Mortgage brokers don't actually make loans they work with multiple lenders to find the one that will offer you the best rate and terms. Often, these are wholesale lenders who discount the rates they offer through brokers compared to what you'd get if you approached them directly as a retail customer.
When you take out the loan, you're borrowing from the lender, not the broker, who simply acts as an agent. The benefit of a mortgage broker is that they are able to get a variety of quotes from different lenders and present them to you. Instead of applying to each lender separately. You only have to speak with one mortgage broker to see what your options are.
Borrowers that use mortgage brokers can also head off any potential problems before going to a bank. The broker can also let them know what their options might be before the lender does, thus making sure their expectations are in line with reality. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings.
However, brokers are subject to the guidelines of the lenders they work with, so it may not necessarily be easier to go with a broker over a direct lender. In fact, a direct lender may be a bit more flexible since they are the ones who set their own guidelines–they may be able to waive certain guidelines at their discretion in order to gain your business. A broker cannot do this without permission from the lender. But if a mortgage broker has built a relationship with their portfolio of lenders they should be able to also offer flexible options to borrowers with permission from their pool of lenders.
Mortgage brokers are paid a final fee based on the mortgage. If you don’t want to pay that fee, you have to choose a lender that is willing to cover the mortgage broker’s fee. Don’t be afraid to discuss this with the mortgage broker. They should be able to tell you which lender may pay their broker’s fee. Remember you are the customer and they are not doing you a favor, you are providing them an opportunity to make money. In addition, there are numerous other mortgage brokers who will be glad to provide their services to you. Also, keep in mind that even though a lender may agree to pay the broker’s fee they may not offer the best deal. A broker’s fee is a one-time cost but higher interest rates will affect your monthly payment and the total cost you will end up paying on the entire loan amount you borrowed.
All lenders also charge certain fees and costs for processing your loan. But in order for a broker to make money, they have to charge a fee because they are the ones doing the work for you.
Shop Around For A Mortgage
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 with. If you get a recommendation for a mortgage broker and 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, they might be able to give you a better mortgage. To read more about shopping for mortgage loans,