Mortgage Broker Vs. Lender: What’s the Difference?

by David B. Coulter on Mar 29, 2021, 04:58 PM

Mortgage Broker Vs. Lender: What’s the Difference?

You might consult either a mortgage broker or a lender In the process of buying a home. These terms are used interchangeably, but it’s essential to recognize some key differences. Knowing these differences can help you make the right choice for you when looking for a lender to provide a loan to purchase a property. 

What is a Mortgage Lender?

A mortgage lender is an institution that provides loans to people. When you buy a property — unless you’re paying for it with cash or doing seller finance — you’ll likely need to take out a mortgage to help you finance the property. The lender will ask you first to complete an initial application, which may be online or over the phone

During this initial application, they will ask questions about your income, your credit score, your debt, and what type/price property you’re looking to buy. They’ll then pull your credit to determine what type of loan would be good for you — such as a conventional, FHA, VA, an ARM, etc. It will also be based on what types of loans they offer. Next, they’ll let you know your pre-approval amount and at what rate/fees. Most people shop around for different lenders before buying their home to make sure they’re getting the best rate and terms possible. 

Examples of Mortgage Lenders

These days, the minute you think about buying a home, you might see mortgage lenders popping up all over the place. But, with so many lenders available, how do you know what’s right for you? Here are some examples of mortgage lenders:

  • A direct lender, like a bank or a mortgage lending institution
  • An online mortgage lender, such as Quicken Loans 
  • A retail lender
  • A portfolio lender

How Do Mortgage Lenders Make Money?

Mortgage lenders typically get paid by origination fees, usually between 0.5% and 1% of the loan’s entire value. These are rolled into the mortgage payments, but sometimes you pay them with the closing costs. You may also have to pay discount points and other fees. This is why it’s important to calculate how much you’d pay over the life of the loan, including the fees. You might find that one option ends up more affordable than all. 

What is a Mortgage Broker?

Now that you know what a mortgage lender is, it’ll be easy to understand what a mortgage broker is, how they’re different and how they’re related. A mortgage broker is someone who can connect you with various lenders when you begin your lender search, and they serve as the middleman between you (the individual or business) and the various mortgage lenders. 

Like with a mortgage lender, you’ll complete a similar application. But, with a mortgage broker, you won’t be limited to loan options as you would with a lender as they can offer products from all different lenders. This can be great if you’re not quite sure where to start, how to apply for a loan, how to fill out the paperwork, etc. A mortgage broker can virtually take over the whole process while connecting you with the right lender/loan.

Examples of Mortgage Brokers

Mortgage brokers usually work independently or as part of a brokerage. Due to this, you can simply look up “mortgage broker near me” to see who comes up, check their reviews, and/or ask someone you know for a recommendation. Often — if you’ve already found a real estate agent — they might refer you to a mortgage broker (though, sometimes a lender) that you can contact to start the process. 

How Do Mortgage Brokers Make Money?

A mortgage broker gets paid in a similar way to a real estate broker when an agent who closes a sale has to give part of their commission to the broker. Although a broker can originate fees, they cannot fund the loan itself — that must come from the lender. 

When the loan finally goes through from that lender, the broker will usually get paid a fee of 1% to 2%, according to U.S. News & World Report. The borrower sometimes pays this in closing costs, rolled into the entirety of the loan, or paid separately by the lender. If this all sounds a bit sketchy, keep in mind the federal law has regulations regarding these transactions. You can also do more research about a mortgage broker vs. direct lender. 

What’s the Main Difference Between a Mortgage Lender and a Mortgage Broker?

When it comes to a mortgage lender vs. a mortgage broker, it’s relatively straightforward. While lenders like banks and other lending institutions can only offer their own mortgage products, mortgage brokers can provide various mortgage options from multiple lenders. 

Someone must be licensed as a mortgage specialist to become a mortgage broker. Brokers who gain these credentials get access to many different mortgage products to ensure you’re not missing out on something. On the other hand, lenders will provide you with the products they have directly. 

Should I Choose a Mortgage Lender or a Mortgage Broker?

The process of buying a home can already be stressful enough, and you usually can’t begin looking for a home until you have your pre-approval from a mortgage lender or a mortgage broker. Everyone has different preferences when it comes to choosing a mortgage lender or a mortgage broker, and there’s no wrong or right answer. 

By understanding what each one does and how they are different — in addition to knowing the pros and cons — then you can make the best decision for yourself and be on the path towards buying your new home.

Pros and Cons of a Mortgage Lender

Pros:

  • Very specific products that they likely have experience with lending.
  • In some cases, a more streamlined experience.
  • It may be less overwhelming because there are fewer products.
  • Perhaps lower fees.

Cons:

  • You might not get as much help with the paperwork.
  • You could be missing out on mortgage options that are better for you.

Pros and Cons of a Mortgage Broker

Pros:

  • Access to information on multiple products.
  • They can potentially save you a lot of time.
  • Even though a mortgage broker has to take a fee, they can also waive the fees that many mortgage lenders dish out, saving you more money in the long run.
  • They can help you navigate the process, communicate with the lender, and handle the bulk of the paperwork.

Cons:

  • It may be overwhelming with the different mortgage products they can present to you. 
  • You will still need to do your own research. 
  • You may have to pay a broker fee on top of other fees if they can’t negotiate those down.
  • It’s in the brokers’ best interest to find the lender for you that will give them the highest commission, which means they may not always have your best interest at heart.

If you already have a bank or lending institution in mind — perhaps from what you’ve read, an experience with you using them in the past, or a referral from a friend — then it may be beneficial to go directly to that lender, and keep the broker out of it. But, if you’re starting from scratch and overwhelmed by all of the lenders and mortgage options that exist, then a mortgage broker can help you explore all of these while (hopefully) ensuring you get the best loan for you.

References:

https://loans.usnews.com/articles/should-i-work-with-a-mortgage-broker

https://www.investopedia.com/mortgage/mortgage-guide/mortgage-lenders/

https://www.realtor.com/advice/finance/mortgage-brokers-paid/