On our homepage, you may have noticed our statement, “A mortgage broker does 1 thing and does it better than anyone else… He shops for great deals on mortgages.”
But what if this would be your first opportunity to work with a mortgage broker? How would that experience differ from working directly with a lender? If you have never worked with a mortgage broker before, however, you may not be certain what a broker is or how using one differs from working with a direct lender. How do you know which one to choose?
Let us suggest the following analogy to better understand the difference. Have you ever been to the library? This of a library with hundreds of books. Each book is a lender. The pages of each book are filled with all the various loans, programs, features, pricing etc. Could you go to the library and read a book? Could you read two books? Some books might be a quick read… quick like a rocket! But there is a person at the library. The librarian knows every book in the library. There is a chance…. maybe a good chance… the librarian could talk to you for a few minutes and tell you exactly which book is best for you.
It is probably obvious to you, but in the scenario above the librarian fulfills the role of a mortgage broker. Because the librarian works at the library every day and works with books every day, she can recommend the best books. The mortgage broker is the same. You can select a lender on your own. And, some borrowers may be able to do this with complete confidence in their own ability to expertly operate in the complex field of mortgage lending. Seriously, how often do you talk to the librarian? But this isn’t just a book, this is connected to the largest debt most Americans incur. Maybe if your next library book was that important, you would talk to the librarian. Thus, the mortgage broker.
There are key distinctions between a mortgage lender and a mortgage broker.
- In order to lend money directly, a mortgage company hires an underwriting department, closing department, funding department etc. All these necessary roles are born out of the fact that it is THEIR MONEY paid out at closing. So, underwriting and funding are essential components of direct mortgage lending. A broker does not underwrite and fund loans. A mortgage broker submits a client’s application to a specific lender to fulfill these parts of the transaction. In the end, it is not the mortgage broker who uses their own funds but rather a lending partner’s funds to close the loan.
- Due to government regulations, mortgage lenders and mortgage brokers are treated differently in how the cost of the loan is revealed to the borrower. The rules require more transparency on the part of the mortgage broker than is required by a mortgage lender.
- Mortgage brokers will not be involved with the servicing of your loan after closing. If you have had a mortgage loan before, you are familiar with the fact that all loans are made so that they can be sold after the closing. So, using a direct mortgage lender is not a guarantee they will service your loan for the duration. They may. They may not. A mortgage broker will not because, in almost all instances, that is not part of the mortgage brokers business.
- As you can see, the mortgage lender may have an extensive business which employs many different skilled individuals: Originators, Account Executives, Account Managers, Underwriters, Closers, Funders, Managers (you get the point). The mortgage broker will likely not have many of those positions. Typically, there is the mortgage broker who fulfills the role of originator. Many mortgage brokers hire or contract with processing services to help speed the process along.
First, here is the distinction between a mortgage lender and the mortgage broker:
- A direct mortgage lender originates a loan. You are borrowing directly from the company.
- A mortgage broker partners with a network of lenders to connect you with the lending product that serves your needs.
It would be easy for us to say that you should always choose a mortgage broker, considering that we are one. But we want you to be fully educated about all your options.
Below, you can read about both the pros and cons of using a mortgage broker rather than a direct lender. Hopefully, this will guide you in deciding which is right for you.
Pros of Using a Mortgage Broker
- A mortgage broker can save you a significant amount of legwork. If you are shopping for a loan through a direct lender, you will have to conduct all of the research needed to hunt down the best rates and terms. When you work with a mortgage broker, the broker takes care of that for you.
- Just like the librarian might get the best deal buying a book, the most broker can typically get the best deal on a mortgage. It is the difference between purchasing items “wholesale” and “retail”. Many times, because of the volume in which a mortgage broker deals, the broker may have better negotiating power for interest rates. Mortgage brokers are often given access to exclusive unadvertised rates and deals which you would not be able to take advantage of if you applied directly with a lender.
- The better the mortgage broker, the better the chance that broker will have developed relationships with multiple lenders. Remember our analogy, each lender is like a book in the library. A good mortgage broker is going to know those books front and back. They are likely to know right where to look for the solution you need. Can you imagine searching an entire library looking for one single page which fits you perfectly?
- We often hear that mortgage industry is a “cookie cutter” industry now. All loans are the same. But that isn’t true. The industry is evolving all the time. Good mortgage brokers are constantly striving to know all the new programs and guideline changes which make one lending option superior to another. You might have access to a greater range of diversity in loan products when going through a broker. Not every lender can handle every type of loan. But with a huge network of lenders to choose from, a broker can bring every possibility to the table.
Cons of Using a Mortgage Broker
- At the end of the day, it is not the mortgage broker’s money. The lender will have the final say as to when the money will be supplied to the closing. This is not often a factor. However, mortgage brokers are reliant on their lending partners to complete the underwrite and deliver the funds to closing. A good mortgage broker will do everything in their power to make this as smooth as possible.
- You know how one bad apple can spoil the bunch? Well, many believe, rightly so, that unscrupulous mortgage brokers helped contribute to the financial crisis of a decade ago. The industry has changed in many ways with mandatory licensing, compensation reform and anti-steering legislation. These reforms have been designed to remove bad actors from the mortgage industry. As well, mortgage brokers can no longer steer a customer into a product just because the broker wants a larger payday.
You can see that mortgage brokers are different. Both operate within a key space of the mortgage industry. Overall, you should be able to avoid potential drawbacks simply by doing your homework before you select a mortgage broker to work with.
When shopping for a mortgage broker, check reviews to see what other customers’ experiences were like. Were the good-faith estimates they were given typically accurate? Did the broker pressure them toward expensive loans? Have they been satisfied with their loans over the long term?
If you can avoid these drawbacks, you should find that the advantages are well worth it. The mortgage broker can save you valuable time and expense while also reducing hassles and stress. By reaching out to their network, they may also be able to connect you with a spectacular offer which you would never otherwise have come across.
Let Grandview Lending Connect You with the Ideal Loan
At Grandview Lending, we put our customers’ interests first, and strive to connect Indianapolis homebuyers with the most affordable and flexible home loans. To get started today, please call (317) 255-0062. We look forward to bringing you the most competitive offers from our network of trusted lenders.
Previously, we talked about how choosing your next book to read at the library isn't as big a decision as choosing your next mortgage. That is certainly true. But libraries house vast amounts of knowledge, and that part of the metaphor is applicable as well. The book you choose to read next does matter, because it broadens and deepens your knowledge. Thus, getting a recommendation from the librarian can empower you.
The same is true with a mortgage broker--but in a much bigger way. The broker, like the librarian, has access to a huge amount of information. If you find a broker you can trust, that broker's knowledge and access can empower you to make a smart financial decision. And when the broker connects you with the most ideal loan for your needs, that mortgage can empower you to achieve your financial goals.