Shopping for a lender can feel confusing and a little intimidating. With so many companies and types of lenders to choose from, you might feel analysis paralysis. Understanding the differences between the main types of lenders can help you narrow down the field.
The type of loan you choose is obviously important, but choosing the right lender could save you money, time and frustration. That’s why taking the time to shop around is crucial. It’s a crowded field, too. There are retail lenders, direct lenders, mortgage brokers, correspondent lenders, wholesale lenders, and others, where some of these categories can overlap.
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You’ve probably seen the terms "mortgage lender" and "mortgage broker" in your home-buying research, but they have different meanings and functions.
What Is a Mortgage Lender?
A mortgage lender is a financial institution or mortgage bank that offers and underwrites home loans. Lenders have specific borrowing guidelines to verify your creditworthiness and ability to repay a loan. They set the terms, interest rate, repayment schedule and other key aspects of your mortgage.
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Mortgage Bankers
Most mortgage lenders in the U.S. are mortgage bankers. A mortgage bank could be a retail or a direct lender—including large banks, online mortgage lenders like Quicken, or credit unions.
What Is a Mortgage Broker?
A mortgage broker works as an intermediary between you and lenders. In other words, mortgage brokers don’t control the borrowing guidelines, timeline or final loan approval. Brokers are licensed professionals who collect your mortgage application and qualifying documentation, and can counsel you on items to address in your credit report and with your finances to strengthen your approval chances. Many mortgage brokers work for an independent mortgage company so they can shop multiple lenders on your behalf, helping you find the best possible rate and deal. Mortgage brokers are typically paid by the lender after a loan closes; sometimes the borrower pays the broker’s commission up front at closing.
Mortgage Brokers
Mortgage brokers work with a host of different lenders, but it’s important for you to find out which products those lenders offer. Keep in mind that brokers won’t have access to products from direct lenders. You’ll want to shop a few lenders on your own, in addition to one or two mortgage brokers, to ensure you’re getting the best loan offers possible.
How They Get Paid
Mortgage brokers (and many mortgage lenders) charge a fee for their services, about 1% of the loan amount. Their commission can be paid by the borrower or lender. You can take a loan at “par pricing,” which means you won’t pay a loan origination fee and the lender agrees to pay the broker. However, mortgage lenders typically charge higher interest rates. Some brokers negotiate an up-front fee with you in exchange for their services. Make sure you ask prospective brokers how much their fee is and who pays for it.
How They Help
Mortgage brokers can help save you time and effort by shopping multiple mortgage lenders on your behalf. If you need a loan with a low down payment requirement or your credit is not so pristine, brokers can look for lenders that offer products tailored for your situation. Brokers typically have well-established relationships with dozens, if not hundreds, of lenders. Their connections can help you score competitive interest rates and terms. And because their compensation is tied to a loan closing successfully, brokers tend to be motivated to deliver personalized customer service.
Drawbacks
Once a mortgage broker pairs you with a lender, they don’t have much control over how your loan is processed, how long it takes, or whether you’ll receive final loan approval. This can add more time to the closing process and frustration if delays arise. Also, if you choose a loan at par pricing, your lender might charge a higher interest rate to cover the broker’s commission, costing you more.
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