Okay, so you’re ready to buy a home. You have your bank statements, tax returns, W2’s, paystubs and/or a financial statement for your business. You’ve pulled a free 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?
Your cousin is a mortgage broker and promises they can get you a great deal. Every time you go in your local bank, the manager is always pushing for you to get a mortgage with them. You trust your cousin but you’ve been with your bank for years and they know your financial history. Who should you choose? It’s a decision many home buyers face. A mortgage broker or a direct lender? Let’s examine the pros and cons of both.
A Mortgage Broker
This is an intermediary between the customer and the 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.
Pick one with your best interests at heart
In the past they had a dicey reputation because they only get paid when the loan closes and usually get points, or a percentage of the loan amount, so they are salesmen/women. The bigger loan they get you approved for the bigger their check. In the wild west of low or no doc loans this resulted in borrowers getting saddled with loans they couldn’t afford. However, post 2008 guidelines have been put in place to safeguard against this.
Tailor made loans
The advantage of using a mortgage broker is that they are experienced in analyzing loans, negotiating them and choosing the best one for a client’s personal circumstances. For example, if a buyer is after a starter home or condo and has no intention of staying there for over 10 years it might not make sense to get a 30-year mortgage. Similarly if a buyer is looking for an investment property for cashflow purposes which they can sell once it appreciates in value, an interest only mortgage may make sense. These are not options that a direct lender may have.
A Direct Lender
This is usually the mortgage department of a high street bank.
Comfort and convenience
They 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. 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 of their financial institution may also receive a slight discount on the interest rate. The process may be faster than going through a broker. When you are dealing directly with the bank, there is no middle man/women.
The take away
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. A 30-year fixed rate mortgage 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.