Direct lenders are financial institutions that will control the entire loan process, from the initial appointment to the application process, to closing. They will directly provide you with the borrowed funds. Brokers, on the other hand, are independent parties who will shop to mortgage companies and other lenders for you. There are distinct advantages and disadvantages of both.
Advantages of dealing with a broker:
- Brokers may seem like a more expensive option, but they do most of the loan paperwork themselves and so in return they get discounted prices from the mortgage companies. This wholesale rate is passed directly onto you in the form of an interest rate that can typically be from 3-8% lower then the standard rate offered by direct lenders.
- Brokers are in constant contact with a list of lenders that the average home buyer would not know about, including out-of-state lenders licensed in other states. They might be able to connect you with a company that otherwise you would never have known about. The variety of lenders ensures a wide variety of mortgage loans as well.
- They are highly knowledgeable as specialists in their field, and as your agent, they are usually highly motivated to see your loan approved.
Disadvantages:
- Brokers charge fees that can be quite pricey, and during the initial interview might tell you of an “ implicit ” service fee which they are not beholden to. They can later drum up added charges in a hundred different ways. Protect yourself and get the fee and other terms in writing in a mortgage broker commitment. Common information to include is the type of loan, the amount, the term, the lock period of your interest rate, a detailed account of all fees (including the broker fee, the origination fee, the application fee, etc.), the points, and the dollar amount of the appraisal and the credit report. This will turn the broker into your agent and cut out the markup that they would normally tack onto the wholesale prices from the lender. The previously agreed upon broker fee, as well as a separate processing fee, should be outlined in the agreement.
- One risk in employing a mortgage broker is that any mistakes they make are mistakes that you have to live with. A mistake made by a loan officer of a direct lender will often be resolved or corrected, but not so with a broker, who is an independent party.
Direct lenders might quote higher interest rates to you, but you don't have to pay the broker' s fee. The savings then for the borrower is the difference of wholesale prices to retail prices plus the savings from better market shopping by the broker. If your broker fee is less than your savings, then you would save money by dealing with a broker. A smart decision would be to go to an Upfront Mortgage Broker (UMB), instead of the traditional mortgage broker.
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