You’re ready to apply for a mortgage loan and begin the hunt for your dream home. Now you have to decide between the two main providers of mortgage financing: mortgage brokers or mortgage lenders, the latter including both banks and other direct lenders.
The big difference between the two? Mortgage banks and non-bank direct lenders rely on their own money to fund their mortgages. When you apply for a mortgage loan at one of these lenders, you'll work with that company's employees, everyone from the loan officer who takes your application to the underwriters who verify that you can afford a monthly mortgage payment.
Mortgage brokers act a bit like insurance brokers. They don't work with one company. Instead, they work with a wide range of wholesale lenders. This means they can offer you a greater number of loan products.
Whether you should work with a direct mortgage lender or a broker depends on your individual finances. But in general, if you have a solid credit score without any missed or late payments on your credit reports, you can expect to pay lower fees when working with a mortgage lender directly. If your credit is less-than-perfect, though, and you might need a bad-credit mortgage, a broker might be able to find a loan with a lower mortgage rate. And if you’re struggling to qualify with a mortgage banker or non-bank lender, a broker, who works with several lenders, might be able to find an originator that will approve you.
The pros of a mortgage broker
Phil Shoemaker, chief business officer of Home Point Financial in Ann Arbor, Michigan, said that working with a mortgage broker can save borrowers money.
That's because brokers work with several lenders, just as insurance brokers can provide policies from a variety of insurance companies. Lenders, though, can only offer borrowers their own mortgage products, Shoemaker said, which might not come with the lowest possible fees or interest rates.
"Homebuyers aren't captive to one lender's interest rate or closing fee," Shoemaker said. "They can evaluate the rate and fees of multiple lenders and choose the one they prefer."
Shoemaker compares hunting for a mortgage to shopping for any big-ticket item. Consumers should always shop around to find the lowest cost when taking out a mortgage, he said, and working with a mortgage broker can make this process easier.
"In no other major purchase would you get one estimate on a service and go with it," Shoemaker said. "You'd shop around to find the best deal. That's what mortgage brokers do. They shop around among several lenders to find the best deal for each customer's specific financial situation."
More home for the money?
Anthony Casa, chairman of the Philadelphia-based Association of Independent Mortgage Experts, said that brokers can help borrowers get as much home as possible for their money.
He uses this example: Say buyers can afford a monthly mortgage payment of $1,564. If they settled for a mortgage interest rate of 4.75 percent from a mortgage lender, they'd be able to afford a total mortgage loan of about $325,000 without breaking their budget.
But if they instead work with a mortgage broker who finds them a lower interest rate of 3.75 percent on a loan from another wholesale lender, these buyers could afford a total mortgage of about $338,000 while still keeping that maximum $1,564 monthly mortgage payment.
"That could make the difference between getting their dream home or settling for something else," Casa said. "If you want better rates and to increase your buying power, always work with a mortgage broker over a bank."
Why a lender might make more sense
This doesn't mean that mortgage brokers are the right choice for all borrowers. Jared Weitz, chief executive officer and founder of United Capital Source in Great Neck, New York, said that borrowers with good credit can usually qualify for a low interest rate from a mortgage lender.
And f you can qualify for such a rate from a lender, it usually makes sense to work with one instead of a mortgage broker, Weitz said. That’s because brokers usually charge extra or higher fees than do lenders, he said.
If your credit is weak, though? Working with a broker might pay off, even if you have to pay an extra fee to that broker, Weitz said. That's because a broker might be able to find a lender that will give you a lower interest rate despite your bad credit, something that could result in lower monthly mortgage payments.
"What makes brokers great is their ability to work with any lender," Weitz said. "Unlike a bank, they have access to better rates by seeking out different options."
Good credit? A direct lender might be better
Brian Ma, broker with Flushing Real Estate Group in Flushing, New York, said that he advises his clients with solid credit to seek out mortgage lenders. Closing a mortgage with one of these companies is often an easier process, he said.
"Banks, generally speaking, know their products inside and out, and closing loans with a bank is almost always more expeditious with less of a hassle," Ma said.
But Ma does recommend mortgage brokers for certain clients. Clients with late or missed payments on their credit reports might benefit from working with a broker, he said. Those who can't document all of their income might also do better working with a broker, Ma said. That broker can share your information with a greater number of lenders, including those who might not balk at working with borrowers with financial blemishes.
"The ability to shop a potential loan to various banks and not just one bank is what makes a mortgage broker such a valuable resource for Realtors," Ma said. "A mortgage broker is great for matching the facts on hand with a variety of loan programs."