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When you take out a loan to buy a home, you need to choose a mortgage lender carefully.
One important decision you'll make is between mortgage broker vs. lender. A mortgage broker helps you find a lender but it doesn't loan you money. A lender, on the other hand, provides funding to purchase a home.
There are pros and cons to working with a mortgage broker vs. a direct mortgage lender. This guide will help you decide which option makes sense for you.
Mortgage broker vs. direct mortgage lender: What's the difference?
A mortgage lender will lend you the money to buy a home. But there are many different lenders and loans out there. A mortgage broker acts as a middleman to connect borrowers with various potential lenders.
Mortgage lenders
Mortgage lenders provide mortgages -- a loan you use to buy a property. Borrowers repay that money over time. Homebuyers can make a home loan application directly with a lender. The lender will evaluate their financial credentials.
The lender, bank, or credit union will decide whether to approve you and what interest rate and terms to offer. Depending on your credit score and individual financial situation, a different lender might make a different offer. You'll need to get quotes from multiple lenders to explore all your borrowing options.
Once a lender makes a loan, it'll either keep the loan on its books or sell it to an investor. The borrower will repay the lender, or whomever the loan was sold to.
Mortgage brokers
A mortgage broker doesn't lend money. The broker's job is to help borrowers find the best lender for their situation. A broker works with many lenders and acts as a matchmaker or middleman.
They match borrowers with lenders who will provide them competitive terms based on their financial credentials. For example, brokers may be able to match you with the best mortgage lenders for first-time home buyers or with a lender offering bad credit loans.
Mortgage broker vs. lender: Pros & cons
There are pros and cons to working with brokers or lenders.
Mortgage broker pros and cons
Pros:
- Mortgage brokers work with many lenders. They can help you find a loan program you might not otherwise know about. Or connect with a small lender that doesn't provide loans directly to consumers.
- Brokers make it easy to compare loan options. You provide your financial information once. They'll shop your loan around among lenders they work with to find a loan with competitive terms.
- Brokers can sometimes make borrowing less costly. They may find you a mortgage option at a better rate or with lower fees than you could obtain on your own.
Cons:
- Brokers are sometimes paid by lenders. They may steer you towards lenders that pay them higher fees, even if the loan terms aren't as good as others.
- In some cases, you will owe a broker fee directly. This adds to the cost of your loan.
- Not all lenders work with mortgage brokers. You may miss out on some loan options
Mortgage lender pros and cons
Pros:
- You'll apply directly with the lender that issues your loan. This can save time and money in simple transactions.
- You won't have to pay a fee to a mortgage broker. Lenders make money by charging an origination fee and/or by servicing or reselling your loan.
- You'll have more control over the process. You decide for yourself which lenders to get quotes from.
- You may be able to get a better rate by working directly with a lender. This is especially likely if you have a pre-existing business relationship.
Cons:
- It could take more time to find a loan. If you want multiple rate quotes, you will have to submit your information directly to multiple lenders.
- You may not have access to some lenders who only work with mortgage brokers. This could limit borrowing options.
- Brokers might be able to find favorable loan terms. This is especially likely if your situation is complicated.
Mortgage broker vs. lender: Which is better for me?
You don't have to choose between a broker or lender. If you want to use a mortgage broker, the loan process might be easier and you might get a better deal. Going it alone gives you more control and could save money on fees.
Working directly with a lender could be a better option if you prefer to shop around and compare loan rates yourself. Or if you have an existing relationship with a financial institution, that lender may be willing to provide a better rate than you could find through a broker.
If your situation is more complicated you may be better off with a mortgage broker. A broker could also help if you want to simplify your rate shopping. You only need to provide your financial credentials once. The broker can then compare options and match you with lenders.
Whether you work with a broker or lender, make sure to get mortgage pre-approval early. It will give you an idea of the size of loan you can qualify for, which will help as you hunt for a home. And use a mortgage calculator to understand what your loan payment will be.
Still have questions?
Here are some other questions we've answered:
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FAQs
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Mortgage lenders provide funding directly to qualified borrowers. Mortgage brokers serve as matchmakers or middlemen, making it easier for borrowers to find the right loan.
Borrowers can apply directly with a lender that offers mortgage loans. The lender assesses their eligibility and decides what rate and terms to offer. Mortgage brokers don't provide any funding. Home buyers give a broker their financial information. The broker then works to find the best lender for their needs.
However, brokers' interests aren't always aligned with borrowers. Sometimes, brokers may prefer to work with lenders paying them higher fees -- even if they don't offer the most competitive rates.
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A mortgage broker helps a borrower shop around with multiple lenders. The goal is to get the best loan offer. Brokers develop relationships with many lenders. This may include some lenders that don't work directly with borrowers.
Mortgage lenders provide funding directly to borrowers. A home buyer who applies for a loan with a lender only finds out what rates and terms that particular lender is willing to offer. Borrowers who want to compare rates from multiple lenders would need to apply directly with each, if they don't work with a broker.
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You need a mortgage lender because a lender actually loans you the money to purchase a home. You do not need a mortgage broker. However, a mortgage broker can help you to find a lender.
Working with a broker is valuable in situations where you don't want to spend the time shopping around for multiple loan quotes from different lenders. If your situation is complicated, a broker could also help you find a lender willing to work with you. But you can generally find a direct lender without a broker, if you'd prefer to do so.
Our Mortgages Expert
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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