Choosing between a mortgage broker and mortgage lender

Homebuyers are usually advised to do their homework when considering a mortgage, comparing different loan types, rates, and other factors before settling on one. Even a seemingly miniscule rate reduction can result in considerable savings over the life of the loan, while unexpected terms or fees may take an unanticipated bite out of your bank account.

As part of their considerations, home shoppers must also decide whether they want to use a lender or broker to get their mortgage. Each option has its own advantages and disadvantages, and your final choice may depend on what particular conveniences are most useful to you.

Lenders

Lenders are companies that directly provide the money to borrowers to use in a home purchase. Deborah Kearns, writing for the financial site Bankrate, says lenders also set all the terms for the loan, including the interest rate, fees, and repayment schedule.

There are numerous different types of lenders. Retail lenders offer their own mortgage products directly to customers. The real estate site Zillow says these services can be provided online, over the phone, or in person at a physical location.

Wholesale lenders fund applications provided by brokers, while correspondent lenders initiate the mortgage process but sell the loan to a larger institution soon after. Kearns says there are also portfolio lenders, which are associated with financial institutions such as banks and credit unions, and hard-money lenders, which typically provide short-term loans with higher fees and interest rates.

One advantage to working with a lender to get a mortgage is that you'll be working directly with the entity that services the loan. Zina Kumok, writing for the financial site Investopedia, says this allows for a faster process than if you work through an intermediary, since all the necessary steps can be completed by the lender.

You may also be able to get the most advantageous terms by working directly with a lender, especially if you choose your existing financial institution or one where you previously took out a loan. OneTrust Home Loans, a lender based in San Diego, Calif., says the costs and interest rates are usually slightly lower, and many are licensed to work nationwide.

There are also some limitations to what a lender can do, though. Mitch Strohm, writing for the mortgage resource HSH.com, says there will be a limited number of options available, since each lender specializes only in their own products. Lenders may also have stricter requirements for borrowers with lower credit scores.

Buyers should also be prepared for a little more legwork when working directly with lenders. It's best to compare the offerings from multiple lenders, and Kumok says it's best to apply to more than one lender so you have a few choices to work with.

Brokers

Mortgage brokers are professionals who work to match a borrower with a lender. Kearns says brokers don't fund the mortgage or set any terms of the loan, and are paid either by the lender or the borrower. The broker charges a small percentage of the loan for their services.

Brokers have a relationship with numerous lenders. Zillow says this setup allows them to review the different options available and match you with one that will get you the best rate and terms.

Experienced brokers can also provide you with information on what kind of loans are best for your situation. For example, Kumok says a broker may work to find you a lender whose products are better suited for condominiums if you are searching for this kind of property.

Using a mortgage broker can greatly simplify the search for a home loan. Instead of comparing the options from numerous different lenders, you'll simply be dealing with a single person who can do this work for you.

One disadvantage to brokers is that they're more limited in scope. Strohm says they're usually only licensed in a small number of states, which can impede their ability to search for loans outside their immediate area.

Brokers may also not be able to provide as much assistance after the loan is finalized. Zillow says that since their role involves matching you with a lender, a broker is unlikely to be able to assist with particular questions you have about your loan.

You'll also want to make sure a broker is offering a full range of options. Kumok says brokers may be partial to certain lenders, and that their advice may be influenced by the size of the loan.

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