The major difference between a mortgage lender and a broker is the source of the money for the mortgage loan. A bank acting as a lender makes loans directly to borrowers, while a broker acts as a middleman between lenders and borrowers.
Source of Funds
The company that provides the money when you close on a new mortgage will be the lender on the loan. If your bank is acting as a lender, the bank will be the funding source for the money that pays for your home or refinances your old mortgage. A broker works with several wholesale lenders. When you close on a broker-sold loan, the wholesale lender that handled your application provides the money. The broker acts as a go-between for wholesale lenders and borrowers.
Who Handles the Underwriting
The bank as lender handles all of the steps required -- from taking your application to approving the loan and providing the paperwork required when the loan closes. In the lender's case, the underwriting is handled in-house. With a broker, your application is sent to a wholesale lender who handles your application and underwrites the loan. The broker's company is not involved in the approval process for your mortgage. Questions on the application will go through the broker to you and back to the wholesale lender.
Brokers claim that they can shop different lenders for the lowest rate for your new mortgage. However, the rates on most mortgages are driven by yields in secondary markets and there will be little difference in the rate you can get between lenders. Brokers, as middlemen, must charge a fee for their services, which could make the closing costs from a broker higher than from a direct lender. This may not always be the case, since a direct lender may have a similar cost structure and just keep the extra fees for the bank. If you are shopping for a mortgage, compare rates, fees and the how quickly the lender responds to your inquiries.
Potential Broker Benefits
For the usual conventional mortgage, there may be little difference between a direct lender and a broker. However, there are situations where using a broker may provide a benefit. A home buyer with special circumstances may do better with a broker. Since the broker has access to a number of lenders, the loan officer for the broke can send applications from a borrower with a special situation to a lender that is more likely to approve the borrower for a loan. Self-employed individuals and borrowers looking for jumbo mortgage loans might benefit from consulting a broker when shopping for a loan.
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