Unless you’ve socked away some serious cash, buying a home means taking out a loan to pay for it. You could enlist the help of a mortgage broker to find a loan or approach a mortgage lender directly. Both have their pros and and cons and it helps to understand how the two are different before you sign off on a loan with either one.
What does a mortgage broker do?
A mortgage broker is essentially a go-between for home-buyers and mortgage lenders. The broker looks at your credit profile, income and debt and uses that information to determine what your loan options are. They then try to match you with a lender that’s going to offer you favorable terms on a mortgage.
When you actually apply for a loan, the broker is responsible for putting all of the paperwork together, collecting supporting information like your tax returns and pay stubs and passing all of that on to the lender. If the lender has a question about something or requires further documentation, it’s the broker’s job to get whatever is needed from you.
Comparing a broker to a lender
A mortgage broker doesn’t actually fund loans; that’s the domain of a mortgage lender. When you work directly with a lender, a loan officer reviews your credit reports and scores, income, debts and other financial details to decide whether you qualify for a loan, what kind of loan you’re eligible for and the interest rate you’ll pay.
Once you’re approved, the lender funds the loan so you can complete the home purchase. Any closing costs that are due are paid directly to the lender. In most cases, they’ll then sell your mortgage on the secondary market down the line.
Which one is better?
Brokers and lenders have the same goal–to help you buy a home–but one may be better suited to your situation than another. In terms of loan options, for instance, you may have more variety by going straight to the bank. That’s because mortgage brokers may be limited to offering specific loans, based on which lenders they work with.
Another advantage of using a lender versus a broker to get a mortgage has to do with cost. Mortgage brokers get paid a commission fee by the lender for helping to secure the loan. If you look at your loan estimate, you may see something called an origination fee. This is how the broker gets paid and it’s typically between 1% and 2% of the loan amount.
For a $200,000 home, the broker would pick up between $2,000 and $4,000 in commission. When you’re working with a loan officer, they may be paid hourly or if they’re paid a commission, it may be lower than what a broker would charge.
One significant difference to keep in mind is how brokers and lenders qualify loan applicants. If you have a credit score that’s at the bottom of the cutoff range for getting a mortgage, for example, the bank may view you as too much of a risk and decide not to work with you. A broker, on the other hand, could use its network to find a lender who’s willing to give you a loan, despite a lower credit score.
Do your research first
When looking for a mortgage loan, don’t be one of the 47% of Americans that don’t take the time to shop around. This is especially true if you’re going through a broker. Mortgage brokers are in business to make money and some of the less reputable ones may try to steer you towards a more expensive loan to get a bigger commission for themselves. Compare loan options with different brokers and individual lenders to make sure you’re getting the best deal on the interest rate and fees before you commit.
