Navigating the mortgage world can be incredibly challenging — especially for newcomers. With so many decisions to make, the process can quickly become overwhelming.
One of the most important decisions you have to make early in the process relates to choosing between a mortgage broker and a direct lender. So here’s what you need to know about both so that you can make the right decision:
What Is a Mortgage Broker?
A mortgage broker is essentially a middleman that works with both buyers and mortgage lenders. Unlike a lender, mortgage brokers do not actually offer mortgage funds. Instead, their sole purpose is to help borrowers find the right loan product and lender for their unique financial situation and needs.
Not just anyone can become a mortgage broker. All mortgage brokers must be properly trained and licensed by the state. In order to receive a mortgage broker’s license, one must pass the National Mortgage Licensing System (NMLS) exam. Even after receiving a mortgage broker’s license, one must complete continuing education courses on a regular basis.
Mortgage brokers also need to build their lender network by getting approved with several different lenders. This typically requires the submission of a "broker package" and providing documentation that points to your experience, references, background check, and performance as a mortgage broker.
Some of the pros of working with a mortgage broker include:
Mortgage brokers offer more options. Mortgage brokers work with many different lenders that offer countless types of loan options. With more options, you’re more likely to find a loan product that works for your financial situation.
Mortgage brokers provide expertise. Since mortgage brokers are highly trained and experienced, they can provide you with invaluable expertise and knowledge about the mortgage industry that you otherwise wouldn’t get.
Mortgage brokers take a lot of the work off your shoulders. Mortgage brokers do a lot of the heavy lifting for you. You no longer have to research several different lenders.
You no longer have to apply and fill out loan application paperwork at several different lenders. You no longer have to negotiate with lenders or stress about securing the best mortgage rates.
Mortgage brokers can negotiate on your behalf in the loan process. Mortgage brokers are able to negotiate on your behalf and may be able to secure better interest rates than you would be able to get on your own.
Cons of Working With Mortgage Brokers
Some of the cons of working with a mortgage broker include:
Mortgage brokers don’t work for free. Instead, mortgage brokers charge broker points that usually amount to 1% to 2% of the loan amount. So, in addition to paying between 2% and 5% in closing costs to the lender, you have to pay 1% to 2% in the broker's commission. For a $250,000 loan, the broker fee can range from $2,500 to $5,000 . Ask them their fees upfront to help aid in your calculations.
Mortgage brokers don’t have direct control in certain circumstances. Mortgage brokers work with lenders, not for lenders. As a result, they don’t have much control over the underwriting process. So while they may be able to help negotiate on your behalf, the final decision doesn’t fall to them.
Mortgage brokers may not be the best option for everyone. If you are a highly qualified borrower with excellent credit and verifiable income, or have a good relationship with a bank, it may be worth speaking with a lender directly and save on the additional fees associated with a mortgage broker.
What Is a Direct Lender?
A direct lender is an entity that provides funding for real estate purchases. Since these entities provide direct funding themselves, they often have strict requirements in place to ensure they actually get their money back. Some examples of direct lenders include financial institutions like banks, credit unions, and even private companies.
Pros and Cons of Using a Direct Lender
Just as using a mortgage broker comes with both pros and cons, so does using a direct lender. Let’s dive into some of these different factors so that you can make an informed financial decision.
Pros of Working With a Direct Lender
Some of the pros of working with a direct lender include:
Direct lenders can be more “direct” and efficient. Working directly with a lender is often an easier and more efficient process since you’re effectively cutting out the middleman (mortgage broker).
Direct lenders may offer better rates and lower closing costs. Working directly with a lender could potentially get you better rates and lower closing costs since many lenders offer “direct deals” for working with them directly.
Direct lenders offer more control. Working directly with a lender gives you more access to the people who are actually processing and approving your loan. If any issues come up during the underwriting process, it might be easier for you to negotiate with them directly to find a solution that’s suitable for both parties.
Direct lenders may offer special incentives. Working directly with a lender may provide you with special incentives you wouldn’t otherwise get.
For example, you might be able to open a free checking account if you have a mortgage with a bank. You might also be able to get better rates on other types of loans like auto loans with the same lender since you have a mortgage with them.
Cons of Working With a Direct Lender
Some of the cons of working with a direct lender include:
Direct lenders often have limited options. Direct lenders tend to offer limited loan products. As a result, it may be difficult to find what you’re looking for when you work directly with a lender.
Direct lenders make it hard to compare rates. A low-interest rate should be your number one priority in a mortgage. However, when you work directly with a lender, it can be hard to compare rates with other lenders to make sure that you’re getting the best possible rate.
Direct lenders require more legwork. Since you have to find the best interest rate when working directly with lenders, the process requires more legwork on your part. You have to find, approach, and apply for mortgages with several different lenders to ensure that you’re getting an ideal interest rate.
How To Choose Between a Mortgage Broker and a Direct Lender?
Based on everything you’ve learned so far about mortgage brokers and direct lenders, you might still be wondering which one you should choose based on your own financial scenario and goals….thankfully, Vaster is here to help guide you through the process.
You may want to consider working with a mortgage broker if…
You’re looking for a specific type of loan that’s not offered by many lenders.
You’re a first-time home buyer that’s looking for more guidance throughout the entire lending process.
You don’t want to spend the time or effort on searching for and applying at several different lenders.
You are self-employed or have a below average credit history.
You may want to consider working directly with a mortgage lender if…
You’re looking for a common type of loan that’s offered by most lenders.
You’re on a tight timeline and are looking for an expedited process.
You don’t mind spending more time and effort researching different lenders and completing multiple applications for loan estimates.
How To Move Forward With a Mortgage Broker
If you’ve decided that using a mortgage broker is best for you, here’s what you need to do to move forward:
Search for potential mortgage brokers based on personal referrals or online research.
Make sure that your potential mortgage brokers are properly licensed and have good reviews from previous clients, proving their professionalism and trustworthiness.
Schedule meetings with potential mortgage brokers to discuss what you want and need in a mortgage.
Choose the best broker based on your meetings and move forward with the application process.
Based on your application and your financial needs, your mortgage broker will recommend specific types of loans from specific lenders.
Your mortgage broker then coordinates with your chosen lender throughout the underwriting process.
Once you’re cleared to close, you will pay your down payment, closing costs to the lender, and any applicable fees to your mortgage broker.
How To Move Forward With a Direct Lender
If you’ve decided that working directly with a lender is best for you, here’s what you need to do to move forward:
Search for potential lenders based on the type of loan you’re looking for.
Make sure that your potential lenders have good reviews from previous clients.
Schedule meetings with potential lenders to discuss your financial situation and what they can offer.
Apply for pre-approval with several different lenders so that you can find the best interest rate.
Choose the lender that offers you the best interest rate, and move forward with the formal application process.
Complete the underwriting process by providing any necessary documentation to the lender.
Close on the loan by paying closing costs to the lender in addition to your down payment.
Vaster as Your Direct Private Lender
If you’re looking for a direct private lender or mortgage broker that offers flexibility and efficiency, look no further than Vaster. Vaster is also known for offering bridge loans, a loan product that can be difficult to find. We have relationships with banks across Florida and can work as a mortgage broker to find you the best rate and terms.