The journey to buying your new home is an exciting ride, marked by the thrill of finding the right place, along with some apprehension of navigating the complex world of mortgages. You may be feeling overwhelmed by the process of securing a mortgage.
After all, mortgages aren’t one-size-fits-all. Many buyers have several mortgage options to choose from: mortgage type, loan term, and down payment amount. There’s a lot to consider when figuring out how much of a mortgage you can afford and deciding on a specific mortgage product.
The good news is that there are mortgage professionals who are ready to help you through this process. Mortgage brokers and mortgage lenders both serve homebuyers in search of a home loan. But they operate very differently.
In this article, you’ll learn the difference between a mortgage broker vs. lender. Keep reading to find out what each professional does and how you can leverage their knowledge and experience to help you make the right mortgage decision for you.
What Is A Mortgage Broker?
A mortgage broker is an intermediary that matches home buyers to home loans.[1] Mortgage brokers do not issue loans directly to buyers; rather, they help buyers compare lenders to find a mortgage loan product that meets their needs. Using a mortgage broker is optional. Homebuyers who do not wish to work with a mortgage broker can work directly with lenders instead.
How Does A Mortgage Broker Work?
Mortgage brokers are familiar with home loan products offered by multiple lenders. Brokers also know what it takes to get a loan from different lenders. This is important because lenders are able to set their own requirements for issuing a loan, such as minimum credit score or minimum debt-to-income ratio. So, a mortgage broker is able to review your financials and tell you which lenders are most likely to approve your loan application.
The process of working with a mortgage broker may begin with a discussion of your goals and a review of your financial documents. This can help the broker understand how much you’re looking to borrow and how likely you are to qualify for a home loan.
Then, the broker can take your information to multiple lenders, getting quotes from each lender so that you can compare important loan factors like interest rates, fees, and terms.
It is important to understand that mortgage brokers don’t have to present every available option to you. They can focus on products from their “preferred” lenders. This could mean that your information is only presented to the lenders that offer favorable commissions to the broker or those whom the broker simply enjoys working with.
Once you choose a lender, the broker may continue to serve as the central point of communication until the loan is issued. They might, for example, request updated financial statements from you and provide those statements to the lender.
When the loan is funded, meaning that the money is made available to you to complete the home purchase, the broker has earned their fee. This fee is often a commission paid by the lender, much like a finder’s fee, for generating new business for the lender.[2] However, other fee arrangements are possible. If you choose to work with a mortgage broker, ask upfront how they are compensated..
What Is A Mortgage Lender?
A mortgage lender is a financial institution that issues home loans directly to homebuyers.[1] If you plan to use financing to purchase your new home, you need a lender who is willing to loan you the funds. As we have discussed, a mortgage broker can connect you with a lender. But if you prefer to cut out the middleman, you can work with a lender directly.
What Is The Process Of Working Directly With a Lender?
Working with a lender begins in much the same way as working with a mortgage broker. You will discuss your goals and your financial situation, and the lender will guide you to the mortgage products that may best suit your needs.
It is generally a good idea to compare multiple lenders on your own if you are contacting lenders directly. This process of shopping for favorable loan terms can potentially save you money by helping you locate the offer with the lowest interest rates and fees. The Consumer Financial Protection Bureau recommends contacting at least three lenders before choosing one.[3]
Unlike working with a mortgage broker, working with lenders directly means that you need to complete a separate loan application for each lender you wish to receive a quote from. Many lenders offer mortgage loan applications online. This can be a good time-saver when completing multiple applications with different lenders.
When you complete a loan application, the lender replies with a loan estimate.[4] The loan estimate is a three-page form that provides important information about the proposed loan, including the estimated interest rate, monthly payment, and total closing costs for the loan. The loan estimate also notifies you of special conditions. For example, if there is a financial penalty for paying off the loan early, this condition would be noted in the loan estimate. This form makes it easier to compare offers from different lenders.
Once you choose a direct lender, you work with them until the loan is issued. They may request additional information or documentation from you as closing day approaches (this is the day on which the property is officially transferred to you as the new owner). After issuing the loan, the lender may remain the point of contact, issuing monthly mortgage statements and collecting mortgage payments. Or, the lender may outsource these tasks to a loan servicer.[5]
What Is The Difference Between A Mortgage Broker and Lender?
There are two key differences between a mortgage broker vs. lender:
- Their role. Mortgage brokers gather information for multiple lenders, helping buyers to compare terms to find a favorable mortgage product. Lenders provide the funds to help you complete your home purchase.
- Their fee structure. Mortgage broker fees are often paid by the lender in the form of a commission, based on a percentage of the loan’s value. However other payment types, such as flat fees, can be arranged by you or the lender.[2] The lender is typically paid by the homebuyer. Buyers pay an origination fee to process the loan, plus interest over the term of the loan.[6] If a mortgage broker is used, the lender may pass the origination fee on to the broker as their commission.
Benefits Of Working With A Broker
Working with a mortgage broker allows you to quickly compare offers from multiple lenders. This can be a convenient one-stop-shop experience. Additionally, mortgage brokers can be a wealth of information, helping you to understand common requirements among local brokers and explaining the industry terms that you might not yet be familiar with.
Before you decide to work with a broker, you should understand that brokers do not represent every lender. Working with a broker is not a guarantee of getting the best possible loan terms. But by comparing multiple lenders at one time, you can get an idea of the terms that different lenders are willing to offer.
In many cases, working with a broker might not cost any more than working with a direct lender. This is because brokers are often compensated by the lender who gets your business. Be sure to confirm the pay structure before proceeding with a broker.
Benefits Of Going To A Lender Directly
Many homebuyers view mortgage brokers as middlemen and prefer to work directly with the lender who will be issuing their loan. This could lead to more concise communication and a smoother transaction.
The fee structure may also be more clear, or even come to a lower amount, when working with a direct lender, as there is one less party to pay.
Working directly with a lender may also reduce the likelihood of having your mortgage change service providers.
Furthermore, if you have a financial institution that you have already worked with, you might wish to keep your accounts within that group. For example, customers who have been satisfied with their checking and savings accounts with PNC Bank may want to get their home loan from PNC because they know and trust the institution. Having your bank accounts with the same institution that issues your mortgage might also allow for faster, easier mortgage payments from your bank account.
PNC Is Here To Help
Whether you’re a first-time homebuyer looking for a professional partner in navigating the mortgage process or an experienced buyer looking for a wide range of loan options with competitive terms, PNC Bank is here to provide friendly, professional service. You can apply for your new mortgage online with PNC Bank today.
