You are ready to purchase a house. Before you can start thinking about redecorating your home, however, you need to have a plan in place.
The actual lenders of loans are direct lenders. These include nonbank mortgage lenders and banks. The middlemen between a number of lenders are mortgage brokers.
What do Mortgage Brokers Do?
A mortgage broker can access loans from many lenders. This means that you would only need to complete the mortgage application with the broker. The broker would then present you with multiple mortgage options tailored to your needs.
Once you have been approved, you will then be able to deal directly with the lender/loan officer.
Multistate Licensing System & Registry
Brokers receive either lender-paid commissions or borrower-paid fees. Borrower fees usually range between 1% and 2% of total loan amount. Lender commissions for brokers can range from 0.50 to 2.75 percent of the total loan amount. However, lenders often pass these costs onto borrowers by building them into their loan cost.
It is important to discuss the fee structure with potential brokers before you apply for a loan. All fees must be disclosed upfront by mortgage brokers.
Pros in Mortgage Brokerage
Brokers can help you quickly and easily compare different mortgage options because they can offer multiple quotes from different sources.
Lenders may offer more competitive rates to loan brokers than direct lenders. They may also be able waive or reduce fees related to mortgages.
If you are concerned about your credit score or student loans debt, a broker might be able to help.
The Downsides of a Mortgage Broker
Brokers might prefer lenders that offer lower interest rates. Some lenders won’t work with brokers.
A broker might be paid a commission if he or she steers a borrower towards a higher-priced loan.
Lenders may offer homebuyers the same terms and rates as brokers.
The fee for mortgage brokers is 1% to 2% of the loan amount.
What do Direct Lenders Do?
Direct lenders are the actual mortgage providers. This could be a bank, online lender or savings and loan association.
Direct Lender Pros
You will not have to pay broker fees and may be able to get a better rate with lower closing cost.
Direct lenders typically handle all loan processing, underwriting and closing in-house.
The application process can be expedited by using an online non-bank lender. According to Inside Mortgage Finance (an industry research firm), 68% of all mortgages originated by nonbank lenders in 2020.
Direct Lender Cons
It takes time to compare rates and terms from different lenders.
The loan programs offered by the institutions you choose to shop are the only ones that apply to you. A broker might be able offer rates and loans that are not available from a traditional bank.
Okay, but what works for me?
You have two options for home loan options: a mortgage broker or a direct lender. You can request quotes from both lenders and brokers before making your decision.
Pay attention to lender fees You should pay attention to the fees in the “loan cost” section on Page 2 after you apply for a mortgage.
Using the loan estimates from all lenders, you can then compare the interest rate, fees and closing cost.
A mortgage broker may be able help you find a lender who meets your specific needs and credit problems. It can also save you time and effort when comparing lenders.
Direct lenders may be the best option if you already have a relationship with a financial institution.