Okay, so you’re ready to buy a home. You have your bank statements, tax returns, W2’s, pay stubs and/or a financial statement for your business.
You’ve pulled a credit report and feel confident about your approval chances. The only thing left to do is decide who you want to approach to give you a mortgage. A broker or a direct lender? Let’s examine the pros and cons of both.
A mortgage broker is an intermediary between you and a lender. In essence, they serve a similar role to websites such as lendingtree.com or bankratemonitor.com, giving you the opportunity to compare lenders and choose the best loan. They may end up saving you a lot of time in speaking to numerous lenders. But they do charge a commission (in the form of points — a percentage — of the loan which may be higher than the commission charged by a larger high street bank). They may also charge an origination fee on top of a commission which direct lenders generally do not.
The advantage of using a mortgage broker is that they are experienced in analyzing loans, negotiating them and choosing the best one for your personal circumstances.
For example, if you are buying a starter home and don’t intend to stay there for over 10 years, it might not make sense to get a 30-year mortgage. Similarly, if you are looking for an investment property for cashflow purposes which you can sell once it appreciates in value, an interest-only mortgage may make sense. These are options that a direct lender may not have or may not suggest.
If your credit isn’t the best a mortgage broker may know of lenders who work with lower credit scores in exchange for higher interest rates and down payments as opposed to direct lenders who generally insist on a fairly high score to do business.
A direct lender is usually the mortgage department of a regional or large bank, such as Wells Fargo Mortgage.
Comfort and convenience
Direct lenders generally don’t charge points on loans they close. There is a comfort factor in dealing with staff that you already know and have a relationship with. Also the process — application, underwriting, and approval — is usually kept in-house, thus allowing for maximum communication throughout.
But don’t let the smiles, handshakes and lollipops for the kids woo you too much. It’s a numbers game. Only choose your local bank if the numbers work for you. Account-holders might also receive a slight discount on the interest rate. The process may be faster than going through a broker since there is no middleman.
A mortgage lender from a bank or financial institution can be a good bet if you have an existing account, have strong financials and are not looking for anything too nuanced in your loan. Thirty-year fixed-rate mortgages are these guys’ bread and butter. However, if you are looking for something catered specifically to your needs you may want to see what options a broker has.