Next, before deciding on a mortgage broker vs lender, it\u2019s important to understand the difference between the two and to weigh the advantages and disadvantages of working with each.<\/p>\n
Luckily, you\u2019ve come to the right place. In this guide, we\u2019re covering all that plus more, along with sharing expert advice that will help you navigate this important financial decision.<\/p>\n
\n\n\n\n\n Tell us a little bit about your plans (where you’re looking to buy and when you want to make a purchase) and we’ll connect you with top-rated buyer’s agents in your area. It takes only a few minutes, and it’s free.<\/p>\n \n A\u00a0mortgage broker<\/a> is a liaison that helps coordinate a loan between a lending institution and a prospective borrower.<\/p>\n Brokers don\u2019t provide or lend any funds themselves, but use their expertise and resources to connect buyers to lending institutions offering loans that meet their specific needs. Since brokers work with multiple lenders, they can bring forth numerous quotes so buyers can easily choose between loans with different rates.<\/p>\n To do this, mortgage brokers collect required documentation from prospective buyers. This can include bank statements, credit reports, property appraisals, income verification, tax returns, assets, and liabilities. Then the brokers submit this information on a buyer\u2019s behalf. Lenders then use this info to weigh the\u00a0financial profile<\/a> of an applicant for approval.<\/p>\n For their service, brokers charge what\u2019s known as a mortgage broker fee, averaging 1% to 2% of an approved loan amount<\/a> (before interest). For example, a $400,000 loan at a 1% broker\u2019s fee will result in a $4,000 broker commission.<\/p>\n This commission is most often paid after the loan is settled by the lender through what\u2019s known as lender-paid compensation (i.e. finders fee or success fee). The amount can vary from one lender to the next, so it\u2019s possible a broker could make a higher commission with certain lenders.<\/p>\n A broker can also be paid by the borrower through an agreed-upon borrower-paid compensation<\/a> plan. The key difference here is that lender-paid compensation often doesn\u2019t result in any out-of-pocket costs at closing, where borrower-paid compensation does.<\/p>\n A\u00a0mortgage lender<\/a>, otherwise known as a direct lender, is any financial institution (i.e. a bank, credit union, or business) that offers direct funding to a borrower for a home purchase.<\/p>\n Lisa Mathena<\/a>, a real estate agent and top producer with nearly 30 years of experience working with mortgage specialists and selling homes in Delaware\u2019s Southern New Castle, Kent, and Sussex counties, notes that buyers with streamlined requirements and strong credit scores might save money by going through a lender.<\/p>\n When a buyer goes directly to a mortgage lender, there is no middle person. The financial institution and borrower settle all financial paperwork and loan agreements directly. With no middle person, it\u2019s up to the borrower to research and approach potential lenders that fit their needs, along with filling out any necessary paperwork.<\/p>\n Lenders will generally cover their costs by charging borrowers a\u00a0loan origination fee<\/a>, which is generally 1% to 2% of the total loan amount. This fee is either paid at closing or included in the total loan amount and paid with future mortgage payments<\/a>.<\/p>\n The primary way mortgage lenders make money<\/a> is through either collecting interest on a loan’s principal balance<\/a> (the \u201cprincipal balance\u201d is the total amount borrowed, while \u201cinterest\u201d is the additional amount charged by the lender as the cost for borrowing their money, usually expressed as a percentage of the principal balance) or selling the loan on the secondary market to another bank or investor.<\/p>\n Another common option that allows a borrower to potentially save on upfront costs \u2013 but will cost a bit more over the life of the loan \u2013 is the no-closing-cost loan<\/a>. These loans work in one of two ways:<\/p>\n Mathena\u00a0warns that not all no-closing-cost loans (or their interest rates) are the same.<\/p>\n \u201cIf you go through a broker, their no-closing-cost loan may be very different from a typical lender,\u201d she says.<\/p>\n For example, Mathena explains how with a USDA loan \u2013 which is 100% financed and allows the seller to contribute up to 6%<\/a> of the loan amount toward the buyer\u2019s closing costs \u2013 a borrower could potentially move into a house without any money out of pocket and a (currently standard) 3% interest rate.<\/p>\n But if a buyer who doesn\u2019t<\/i> qualify for a USDA loan went to a mortgage broker looking for a loan option with no out-of-pocket costs, they may get a similar deal with a conventional loan\u2026 but may be facing a significantly higher interest rate once closing costs and fees (such as your broker\u2019s origination fee) are figured in.<\/p>\n \u201cSo, you may not be paying the funds upfront, but you\u2019re paying them monthly through the life of the loan,\u201d explains Mathena. \u201cAnd many times (with government loans especially) you can\u2019t refinance out of those loans for X <\/i>number of years.\u201d<\/p>\n Brokers are mortgage experts who work with many different lenders, and they usually know where to go to get specialized loans for borrowers who don\u2019t qualify for conventional loans.<\/p>\n But if you already have a strong relationship with a direct lender, is a mortgage broker’s services beneficial for you?<\/p>\n With direct lenders, buyers approach one lender at a time with their preliminary information. However, brokers take the borrower\u2019s information and reach out to multiple lenders in one sweep to pull in several loan offers at different terms and rates. This gives borrowers a\u00a0variety of mortgage options<\/a> to choose from, making it easy to compare.<\/p>\n Mortgage brokers may qualify for special fee reductions or \u201cwholesale rates<\/a>” on loans that borrowers don\u2019t have access to on their own. In addition to these special fees, brokers often have long-standing relationships with lenders and may be able to negotiate more attractive closing costs, fees, and interest rates.<\/p>\n![\"homelight](\"https:\/\/www.homelight.com\/blog\/wp-content\/themes\/ccprototypev5\/images\/logo-small-cta.png\"){kind=logo}
\n <\/div>\n \n Step one: Talk to a few buyer's agents!<\/h3>\n
What is a mortgage broker?<\/h2>\n
What is a mortgage lender?<\/h2>\n
A note about lenders, brokers, and no-closing-cost loans<\/h2>\n
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Pros of mortgage brokers<\/h2>\n
Offers from multiple lenders<\/h3>\n
Lower borrowing cost<\/h3>\n
A good option for flexible lending<\/h3>\n