September 15, 2016 by Leave a comment

There’s more than one way to get a mortgage. While most borrowers end up going straight to a lender these days, another option—going through a broker—is still fairly popular.

Of course, plenty of borrowers aren’t exactly sure of the difference between a broker and a lender, even after they’ve already made their choice. Here’s some points you should know before locking in your loan.

Mortgage Lending 101

To understand the difference, you first have to know a couple basics about how mortgage lending works.

Even though you may not always be able to open a savings account through a mortgage lender, they are still ultimately a bank. They approve you, underwrite the loan themselves, and then lend you the money. After you close, most lenders turn around and resell the loan to investors so that they can continue to make other loans.

When you work with a lender, you’re going direct to the bank, where you will be charged retail prices and interest rates. A broker, meanwhile, is a middle man who goes between you and a lender and has access to wholesale pricing. Both have some positives, but they also have some negatives. We’ll break those down next.

How They’re Similar

On the surface, your average broker and lender experience won’t look very different. That’s because at a lender, your first point of contact will be a loan officer (sometimes also called a mortgage banker), a commission-based sales person who works for your lender.

If they’re both good at their jobs, they’ll be marketing themselves similarly and be recommended to you by the same kind of people, like realtors.

They both:

  • Gather up your personal information
  • Are licensed in the state you’re buying in
  • Can educate you about the process and can help you make a decision
  • Are salespeople

How They’re Different

Even though they both do the same job, brokers and lenders get it done in different ways.

The key differences:

  • Brokers are less likely to be licensed in multiple states, since they’re more likely to be local, smaller operations.
  • Brokers are likely to work with multiple lenders.
  • Brokers may charge extra fees
  • Only lenders can lock your loan, underwrite your loan, or close and fund your loan (even if you go through a broker).
  • Lenders control guidelines and requirements, not brokers.

Which is Better, a Mortgage Broker or a Mortgage Lender?

As we’ve mentioned, the difference between retail and wholesale pricing can be fairly significant on paper. But then, brokers need to make their money too, so ultimately which option costs less will depend on your individual situation and the fees associated with your loan.

But what about the other factors?

On one hand, brokers aren’t tied to one lender and can thus shop around for the best deal while keeping their overhead low. On the other, they have zero control over what happens to your loan once it goes into processing and underwriting, and won’t be able to help if something goes wrong, or if it gets rejected.

Big lenders, meanwhile, have control over the process and generally offer excellent rates. However, the larger they are, the less likely they are to work with borrowers one on one in special circumstances, like having lower credit.

If you’re stuck when trying to make a decision, try out a smaller or mid-sized lender. Most will be more willing to work with you to find the best deal, like with a broker, but can also keep an eye on your loan all the way through the process.

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