What's the Difference Between a Direct Lender and a Mortgage Broker?
Both brokers and direct lenders work to get you approved for a loan that will fit your needs. Both mortgage brokers and direct lenders are regulated to protect the borrower from dishonest practices. Brokers and direct lenders can both help you with paperwork and answer questions. However, there are several key differences between the two. The following should help inform you about the key differences, so you can make informed decisions when it's time to get a loan.
How does a mortgage broker work?
Brokers are a "middle person". They are completely separate from the financial institution that lends the money. Banks use brokers to outsource the job of finding and qualifying borrowers, which also allows them to pass over fraud liability. Mortgage brokers cannot approve loans. Only a lender can actually approve or decline a loan. Mortgage brokers make their money by collecting a commission on the amount borrowed (typically up to five percent of the loan amount). This extra cost often gets passed on to the borrower as an origination fee or it can even result in a higher interest rate. Additionally, mortgage brokers make their commission whether or not they get the best loan for the client, so they are not always motivated to get the best rate. Some mortgage brokers even get special fees if they get the borrower to accept a loan with a higher percentage rate then they should have received. However, a good mortgage broker acts as a guide during the loan approval process.
Benefits
•· May help you understand the loan process
•· May help you review your financial profile and help you get a good rate
•· May help you prepare documents
•· May help you anticipate and resolve problems with your loan
Disadvantages
•· Origination fee can run quite high, which the borrower often ends up paying for
•· Many brokers prefer lenders that give them the best commissions, but don't necessarily offer the best rates to the borrower
•· Risk that the mortgage broker uses predatory lending practices
•· Risk of hidden costs and misrepresented rates
How does a direct lender work?
Direct lenders do just what the name implies. They lend directly to the client without using a middleman. Your loan is taken care of in house, so you can deal directly with the source. You typically work with a loan officer to assist you with the paperwork and to answer all of your questions. Good direct lenders have a variety of competitive loan options that can be tailored to fit the borrowers individual needs and circumstance. Usually when you go through a direct lender your loan can be processed more efficiently and quickly since there is no third party relaying information back and forth. Basically a direct lender can provide the same services as a mortgage broker, but is able to take care of the loan process directly.
Benefits
•· No middle person collecting extra fees
•· Direct communication with the source of your loan
•· Faster processing
•· More flexibility in underwriting the loan
•· Access to special in-house programs and rates that are only available directly through the lender.
•· Direct lenders normally have a cap on the fees they charge, unlike many mortgage brokers
Disadvantages
•· Some lenders have limited loan programs
•· A direct lender my have limited financing options
•· You may have to do some comparing on your own to find the best loan at the lowest rate (this is true for both direct lenders and brokers)
•· Some direct lenders offer less hands-on assistance than a mortgage broker
Overall, it is a matter of preference and savings whether you choose to work directly with the lending institution or rather you prefer to work with a middle person. It is worth considering that having a middle person doesn't mean you'll get a better rate or have more help with the loan process. It may only end up meaning that you will pay more fees for the same services you could have received directly from the lender. A third party can even prolong or complicate the process, rather than help. Either way, be careful and choose wisely. There are many brokers and lenders with predatory lending practices, which can cause big trouble down the road. Here are the signs to look out for:
The Red Flags of Predatory Lending:
•· Failure to provide all RESPA documents, such as the Good Faith Estimate, Truth in Lending, etc so that the borrower clearly understands the terms of the loan and other policies
•· Falsifying information like income and assets
•· Not explaining Yield spread premium or other hidden fees BEFORE closing.
•· Trying to convince borrowers to refinance a loan when there is no clear benefit in doing so
•· Attempting to create a higher loan amount through inflated appraisals (sometimes in tandem with the appraiser)
•· Unfairly taking advantage of a borrowers lack of information about mortgages and other types of loans
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