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Mortgage Brokers vs. Direct Lenders: What’s The Difference?

Mortgage Brokers vs. Direct Lenders: What’s The Difference?

What’s the difference between mortgage brokers and lenders? What are the advantages and disadvantages of using brokers versus lenders? Which is the best choice?

The mortgage marketplace is a bustling place, and it’s natural to have questions about how it all works — especially with so many new websites, apps, and technology. Plenty of entities and businesses claim to offer the best solution when it comes to financing, but it’s important to be able to distinguish between different types of institutions. Let us break it down.

Mortgage Brokers

On the surface, mortgage brokers may seem very similar to lenders, but a mortgage broker does not actually make loans. Brokers may handle most of the process just as if they were a lender, but loans are actually closed and funded by a direct lender at the time of closing.

A broker has access to multiple loan programs from a wide variety of direct lenders. Brokers can therefore match you with the best fitting lender for your scenario. Think of mortgage brokers like a personal concierge who takes all of the hard work and stress out of shopping around for the best deal. Brokers can also streamline the loan process. They can solicit for loans, take and process applications, and perform automated underwriting. A broker could help you all the way to closing.

Lenders use brokers as marketing and processing arms, which can reduce their marketing and operation costs. In turn, lenders can provide wholesale mortgage rates to brokers.

The Pros:

  • Provides the potential for lower, wholesale rates
  • Brokers work to find the right loan for you
  • There is a streamlined process of shopping for the best loan

The Cons:

  • Brokers cannot make final underwriting and funding decisions
  • Brokers do not have the freedom to make exceptions to guidelines
  • Brokers must rely on lenders to perform well for their clients

Mortgage Lenders

Mortgage lenders hold specific lender licenses. There are a few types of lenders, for example: correspondent lenders or conduit lenders act as a broker-lender hybrid, funding and closing the loan and simultaneously or relatively quickly selling that loan to a direct lender.

Direct lenders have the actual money to fund mortgage loans, and in some cases they will use lines of credit. Direct lenders might also hold on to and service some of the loans they originate, or they might securitize or sell them in the secondary mortgage market.

The Pros:

  • You will deal directly with the lender with the money
  • Lenders can customize and make exceptions to their own guidelines
  • Potential for streamlined communication with no broker in the middle

The Cons:

  • Lenders may be acting as a broker, even though they can lend direct
  • There is no intermediary representation between you and the lender

There can be significant differences between working with a lender and a broker. For help getting started with your home loan process, reach out to Mr. Cooper and speak to a professional today.

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