Should I Use a Mortgage Broker or Lender? Here’s How to Pick

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Broker or direct lender? It’s a question many buyers ask me regularly. Whether it’s buying an apartment building or a detached house, the choice between the two can be difficult to make. They can both get you the money you need to make the purchase, but they each work with you differently to do it.

Simply put, a direct lender such as a bank or credit union works directly with you to approve and finance the loan while a broker works with you in the form of an intermediary to help you find the best possible lender for your particular situation. Once you have identified this provider, start the application process with this institution. What you need to remember is that a broker does not finance the loan, but works with you to secure it.

Related: Choose the best mortgage lender for you

How a runner works

A broker works as an intermediary between you, the borrower and the lender. Remember that the broker does not offer loans directly, but helps you compare potential lenders suitable for your financial situation. This last part is what makes a broker such an attractive option for borrowers.

The broker first meets with a client and discusses their needs regarding the desired amount and the financial situation of the borrower. The broker collects all the relevant information and documents related to the borrower’s income, tax returns, pay stubs, credit reports, investments and all other items that provide a clearer picture of their finances.

From there, the broker analyzes all this information and collects a series of quotes from lenders who are willing to lend the desired amount of money to the borrowers who meet their criteria. This is one of the most important benefits of working with a broker, especially for those with less than perfect credit or a sporadic job record. The broker already knows which lenders are willing to work with these types of customers, so it eliminates a lot of wasted time by skipping lenders who will not approve a loan and focusing only on those institutions that are most likely to succeed.

Related: How the mortgage market opens up to brokers

How a Direct Lender Works

A direct lender is a bank or credit union. The borrower works directly with one of the lender’s loan officers throughout the application and approval process and all that that entails. This obviously simplifies the process of getting the money needed because there is no middleman. The financial situation of the borrower remains under the same level of scrutiny and if it is refused, the borrower has to start the whole process again with a different lender.

Direct lenders will have a number of loan programs on offer, but these may be limited in terms of the most suitable loan type for the borrower and their needs. The lender will determine the borrower’s eligibility for the programs offered and explain which one is appropriate according to the lender’s criteria. This means that a borrower may qualify for one or more programs offered by the lender or even for other more beneficial loan programs that exist in the market but that the lender does not offer.

Working with a direct provider is limited to the programs offered by that provider. By contrast, a broker will always offer the widest possible range of qualified loan programs from all applicable lenders.

Related: 5 tips for real estate investors who want to protect themselves from a market crash

Rates and prices

Working with a broker can lead to higher commissions and higher costs. This is due to all the work and access that a broker provides you. Basically, the broker is doing all the comparison shopping for you, identifying which lenders can offer you the right program for your particular needs. Some of these loans can be quite complex and the more complicated the loan, the more expensive it can be to approve it.

A broker must always disclose the compensation he is receiving in advance. Many of them are willing to work with borrowers and the costs are more easily negotiable than with a direct lender like a bank.

Direct lenders do not need to disclose how much they earn with your loan. That’s why it’s important to do some intense comparison shopping. In the end, you could pay much more with a loan program that was offered at a lower cost to you elsewhere. Yes, you may have some leeway to negotiate a lower cost, but it is not always guaranteed and a higher credit score will almost always have a stronger influence on that possibility.

Related: What it’s like to work with a business loan broker

Which is best for you?

If you have an excellent credit score and your finances are in order, a bank is probably your best bet, especially if you have been a good customer of this institution for a long period of time. They know you, you know them, and they may want to reward your business with favorable loan rates and terms.

On the other hand, if you have less than perfect credit or other difficulties in providing a clear and complementary picture of your financial situation, a broker may be the way to go.

Your financial situation is not the only factor to consider. So is the type of property you want to buy. Some lenders will only work with consumers who want to buy single-family homes and not with those who want to buy an apartment building or a cooperative. A broker will already be aware of which lenders work with borrowers to purchase specific types of properties. This is part of the reason why brokers sometimes charge more for their services.

It is up to you, the borrower, to weigh all of these options, the pros and cons of each, the commissions and expected costs, as well as the willingness to do more work yourself before committing to a broker or direct lender. for your loan.

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