Whether you are a first-time home buyer or are looking to refinance a home you already own, your goal is probably to find the best mortgage rate and lowest fees on your new loan.

 

You also get to choose the type of mortgage company you want to work with. The mortgage industry offers two main options for loan originators.

  1. Direct lenders, which are primarily banks, credit unions, and some mortgage companies. These are financial institutions that originate, process, underwrite and fund loans themselves.
  2. Mortgage Brokers that work with a portfolio of wholesale lenders. They usually originate and process loans, but they do not underwrite and fund the loans.

 

There are advantages and disadvantages to each option. Direct lenders are typically large organizations with much higher overhead than mortgage brokers.  Their higher operating costs means they require higher loan fees to operate profitably.

 

Direct lenders have a more limited offering of mortgage products, so they may not meet the needs of certain customers.  This is especially important for self-employed borrowers, or borrowers with small down payments and/or less than perfect credit.  On the upside, direct lenders usually provide the fastest turnaround time for funding, since they manage the entire loan process in-house.  If you are in a rush to close a loan, this can be a major advantage.

 

Mortgage brokers have lower overhead than direct lenders, which means they can charge lower fees to originate loans.  They also have the greatest flexibility in matching borrowers with the best loan programs to meet their needs, since they have a portfolio of lenders and loan packages to choose from.  However, since mortgage brokers do not directly control the underwriting process of the lender, they may not be able to move your loan through the process as quickly as a direct lender.

 

(NOTE TO THE READER: Be cautious about claims of “zero closing costs”.  As the saying goes, there is no such thing as a free lunch.  Typically, these fees are added to the balance of the loan, and/or increase the annual percentage rate of the loan, so borrowers end up repaying the fees, plus interest, but it is hidden within the structure of the loan.)

 

In Summary

Mortgage brokers have greater loan package flexibility and generally lower fees and rates.  Direct lenders usually have loan packages that work well with highly qualified borrowers and generally close loans faster.  Basically, flexibility and low fees vs. faster completion.

 

There is no set rule about whether you should choose a direct lender or a mortgage broker to originate your loan.  It really comes down to what is most important for each borrower.  What impacts your mortgage rate the most are your personal qualifications… Credit score, down payment, employment/income, loan amount, and type/location of the property.  No matter which lending option you choose, we strongly recommend that you work with a qualified financial specialist that you trust.