When you’re ready to buy a house and need a home loan, a mortgage broker can help you shop for a mortgage, or you can go straight to a direct lender such as a bank or credit union and get the mortgage on your own.
Which way of shopping for a mortgage is better? If you have credit issues or other needs, using a broker to see an array of options might make sense. But if your financial health is solid and you want to save time and money, applying with a direct lender could be a good course of action.
In any case, it’s smart to get a few quotes and compare offers for the same type of loan and term.
What Is a Mortgage Broker?
A mortgage broker is like a personal shopper for home loans and serves as an intermediary between the mortgage seeker and lenders, including banks, credit unions, and private mortgage companies.
With a single application, a broker will provide you with access to different types of mortgage loans and, if you choose one, will walk you through underwriting.
Mortgage brokers are licensed and regulated. You’ll want to ensure that any broker you’re interested in working with is credentialed by checking the Nationwide Multistate Licensing System & Registry consumer access site. You can also check platforms like the Better Business Bureau and Yelp to see what past clients say.
Brokers are compensated by the borrower or lender. Borrower fees typically range from 1% to 2% of the total loan amount. Lender commissions may range from 0.50% to 2.75% of the total loan amount, but lenders usually pass the costs on to borrowers by building them into the loan.
How to Find a Mortgage Broker
You could ask your current lending institution, friends, family members, or real estate agent for a referral to a mortgage broker. After checking licensing, you may interview more than one broker before deciding on one. You might want to ask about their fees, lenders they work with, and experience.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
What Is a Direct Lender?
In the mortgage broker vs. lender dichotomy, a direct lender is the bank, credit union, or mortgage company that originates, processes, and funds mortgages.
Mortgage loan officers, processors, and underwriters work for the company. Loan originators usually work on commission.
A loan officer may offer a mortgage at various price points, from a loan with discount points for a lower rate to a no-closing-cost loan, which is when the lender agrees to pay the closing costs in exchange for a higher interest rate.
Recommended: First-Time Homebuyer Guide
How to Find a Direct Lender
Most people have a relationship with a bank or credit union, so you can always start by getting a quote there. But there are myriad online mortgage lenders and it’s worth considering these options. Pulling up the day’s mortgage rates online will conjure a list of direct lenders advertising their rates.
What Are the Pros of Working With a Mortgage Broker?
Because they are able to offer a variety of quotes from different sources, brokers can be useful if you’re looking to easily compare mortgage options.
They may offer specialized loans, and because loan brokers set their own profit margins, negotiating could be easier.
A broker could be useful if you have concerns like a fair or bad credit score or student loan debt.
What Are the Cons of Working With a Mortgage Broker?
Brokers may have preferred lenders that don’t necessarily offer the best interest rate. If paid by lender commission, a broker could be tempted to steer a borrower to a more expensive loan.
If paid by lender commission, a broker could be tempted to steer a borrower to a more expensive loan.
Brokers’ loans may take longer to close.
Broker fees tend to be higher, but that could be because the mortgages offered are sometimes more complex. And mortgage brokers may charge borrowers directly (the fee of 1% to 2% of the total loan amount).
What Are the Pros of Working With a Direct Lender?
By working with a direct lender, you’ll skip the broker fees, and you may get a better rate with lower closing costs (although both lenders and brokers can offer “rebate pricing” — a higher interest rate in exchange for lower up-front costs).
A direct lender typically does all the loan processing, underwriting, and closing in-house.
You may be able to negotiate underwriting or origination fees.
What Are the Cons of Working With a Direct Lender?
Comparing rates and terms on your own from a sample of lenders takes time.
You’re limited to the loan programs of the institutions where you decide to shop.
What Works for My Situation?
You’ve probably toyed with at least one home affordability calculator and gotten preapproved for a loan.
Once you’ve found a home and your offer has been accepted, it’s decision time on a lender. You are not required to stay with the lender you used for pre-approval.
If you have a sparse credit history, subpar credit, or other challenges, a mortgage broker might be able to find a loan program that’s a good fit.
But if you have solid credit, a strong income, and assets, you may be able to save time and money by working with a direct lender.
What about rates? In weighing mortgage broker vs. bank, there might be no difference to speak of. The rate you’re offered depends more on your qualifications than on the lender.
The mortgage loan process can seem mysterious, and a broker or a loan officer at a direct lender can act as a loan seeker’s guide.
That guide should be willing to answer all of your mortgage questions, including those about points, fees, mortgage insurance, and the closing timetable.
You’ll receive loan estimates after applying. When comparing mortgage offers, it’s important to look at more than the interest rate. Be sure to compare annual percentage rates, or APRs, as well.
Look at the fees in the “loan costs” section, and compare closing costs.
Gain home-buying insights
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The Takeaway
If you’re in the market for a mortgage, you might think the choice comes down to mortgage broker vs. direct lender. But you may get loan quotes from both and compare them. It’s called shopping, and a home is a rather important purchase. And as with any form of shopping these days, it’s easily done with a phone or computer, from the comfort of your couch.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Is it better to use a broker or a direct lender?
If you have a challenging credit score, or limited credit history, or other financial complexities, a broker might be the way to go. But if your finances are solid you may find going the direct lender to be the most cost-effective way to obtain a home loan.
Why use a mortgage broker instead of just going to a bank?
A mortgage broker can research possible rates from a wide range of lenders, which could save you time. And if you have a challenging financial situation or credit history, a broker might be able to steer you to a lender who will work with your profile.
Does a mortgage broker charge a fee?
Yes. A borrower may have to pay a mortgage broker’s fee of 1% to 2% of the loan amount. When the lender pays a broker a commission, it may range from 0.50% to 2.75% of the total loan amount and these costs are passed on to the borrower by being built into the loan.
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