DIFFERENCES BETWEEN USING A MORTGAGE BROKER AND GOING DIRECTLY TO LENDERS
By Maryann Boateng. REALTOR.ca
In this article, we cover:
- What’s the difference between a mortgage broker and a direct lender?
- Working with a mortgage broker
- Working with a lender
Getting pre-approved for a mortgage is one of the first steps of the home-buying journey. A mortgage pre-approval gives you and your REALTOR® a range of how much you can afford to spend. When it comes to finding a lender, there are two typical paths: you can either go directly through a lender, such as a traditional bank, or you can enlist the help of a mortgage broker. Your REALTOR® will be able to provide some options of lenders or mortgage brokers, but first you must understand what both options offer.
WHAT’S THE DIFFERENCE BETWEEN A MORTGAGE BROKER AND A DIRECT LENDER?
A mortgage broker is a licensed professional who acts as a bridge between potential home buyers and lenders. Shane Ferrao, a mortgage broker with YourMortgageYourWay.ca, says a broker will shop around for mortgage solutions on your behalf to ensure you get the best deal. They can also assist with finding lenders other than traditional institutions.
“Mortgage brokers have relationships with dozens of lenders. For example, our brokerage works with over 59 different institutions,” Ferrao explains. “This helps us compare products so that we get potential home buyers the best deal.”
A direct lender is a bank, financial institution, or private corporation that provides mortgages and loans. They’re the ones deciding whether or not you qualify. Typical direct lenders are banks, whether national or international, as well as small to large financial institutions, like credit unions and virtual lenders. When you get a mortgage through a direct lender, you’ll be speaking directly to the people signing off on your loan. You’ll typically engage with a financial advisor or an employee that works at the institution, usually by booking a meeting in person or filling out an online form.
WORKING WITH A MORTGAGE BROKER
A broker is legally obligated to work with your best interest in mind, so you can feel at ease knowing along with your REALTOR®, you have another professional on your side that’s in your corner.
“A broker can help you navigate the ins and outs of all of the paperwork, and you’ll have a direct contact who is working in your favour,” Ferrao explains. “Mortgage brokers work for the customer and also for the lenders.”
As mentioned, a big advantage of a broker is they work with multiple lenders, some who don’t deal directly with the public and can sometimes get you approved even if you’ve been rejected by traditional banks. A broker will collect information regarding your financial situation—income, tax returns, credit reports, etc.—which are required by a lender, then evaluate how much you might be able to borrow and look into your best options. They know which lenders are more likely to offer certain types of mortgages, or ones that typically don’t approve loans for certain types of properties.
Traditional lenders pay mortgage brokers, however some alternative lenders don’t pay as much. If a mortgage broker isn’t charging you a fee, that means they’re being paid by the lender. One potential disadvantage of going with a mortgage broker is if you don’t qualify for a mortgage with a traditional lender, brokers may charge a fee at closing, ranging from 1% to 2% of the mortgage balance requested. Bruised credit and insufficient income could be a couple of reasons why your mortgage would have to be placed with an alternative lender.
There’s also something called the loan origination fee charged by the banks, but in most cases when you use a broker, this is paid to the broker.
WORKING WITH A LENDER
The advantage of going with a direct lender is you’ve probably built a history with an institution, whether it’s a bank you’ve been dealing with since a young age or a digital bank you trade with. This previous history can make the process more comfortable for borrowers, especially if it’s your first time purchasing a home. Plus, if you have an existing relationship with the institution, you may be able to get a better rate or contract terms.
Going to the lender directly may also help you to skip out on fees associated with some mortgage brokers. However, the loan origination fee still applies—it’s just paid to the bank. The lender also makes money on the interest you pay, late fees, and other charges that may come up during the closing period.
If you’re going to a direct lender, you’ll have to do your own research to find the best rate, as you’ll only see the mortgage products available at one particular institution. Once you compile all the options, you’ll have to sort through which makes the most sense for you based on mortgage type and rate.
Curious how much your payments might change based on different rates? Tools like the REALTOR.ca Mortgage Calculator can help give you a better picture.
Moreover, if you plan on exploring different lenders, you’ll need to get credit checks with each one, which can count as a hit on your credit score, unless you get all checks within two weeks of each other. Lenders may also have a higher threshold for mortgage approval.
Whether you choose a direct lender or a mortgage broker, your REALTOR® can help connect you with the right person to help you secure a loan. They’ll be able to provide you with a list of trusted professionals they can vouch for and have worked with in the past. Once you’ve confirmed your ready to start the hunt for a property, let your REALTOR® know so they can provide all the guidance you’ll need.
