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There are several options available to you when you need to find a loan to purchase a home. For example, you can work with a mortgage broker who will take your specific needs and circumstances into account and compare rates from a variety of lenders. You could also research lenders on your own and work directly with one that fits your requirements and offers you the best rate.
What's the difference between a mortgage broker and a lender?
A mortgage broker is an optional third party who connects home buyers with lenders. They gather and verify information from you, such as your income and credit history, and use it to find loans and negotiate rates and terms on your behalf. They can be paid by either you or the lender, so make sure you understand a particular broker’s fee structure before you start working with them. Even when the lender pays, it will sometimes just incorporate this expense into your loan.
A lender is a financial institution, such as a bank or credit union, that would provide home buyers with the actual loan. When choosing a lender, consider the details of your situation in addition to pursuing the best rates. For example, if you live in a rural area and are interested in a USDA loan, you’ll want to concentrate your research on lenders that have a lot of experience with that kind of loan.
Pros of working with a mortgage broker
While it isn’t necessary to work with a mortgage broker, some home buyers do value the guidance, convenience and industry knowledge they can provide.
Brokers can save you time and effort. Because a mortgage broker takes on the responsibility of researching lenders, submitting your documentation and obtaining quotes, they can save you hours of research and help streamline the process of connecting with the right lender.
They may have more knowledge and experience. Most people don’t get involved in the homebuying process more than a few times in their lives. Using a broker means you’ll be working with someone who understands the current lending landscape and has existing relationships with multiple lenders.
There are fewer hits to your credit score. If you work with a mortgage broker, they're getting multiple quotes at once, and your credit is getting only one hard inquiry. However, if you shop around yourself and seek preapproval from several lenders, you might get multiple hits that affect your credit score if you’re still applying more than 45 days after your first application.
You may get a greater range of options. Mortgage brokers will be able to pull many options from multiple lenders, including loan types you may not have known were available to you. When you work directly with a lender, it will be able to tell you about only the kinds of loans it offers.
Pros of working directly with a lender
There are also advantages to working with a lender without involving a mortgage broker, such as cost savings and direct communication.
You’ll cut out the intermediary. Some home buyers simply prefer to do their own research and desire a more hands-on approach to mortgage shopping. If you would rather get face time with a loan officer and represent yourself, you may be better off working directly with the lender.
You can leverage your own relationships. Although you should always shop around to try to get the best deal, you may find better rates at a lender you’ve worked with before. Having an existing account with a lender could grant you access to discounts or offers that may not be available to mortgage brokers.
You won’t be paying a broker. Whether you pay the broker directly or your lender folds these costs into your loan, you may end up on the hook for the mortgage broker’s fees, which are typically 1%-2% of the loan amount. Working directly with a lender allows you to bypass this expense, which can be attractive given all of the costs associated with buying a home.
Thanks to the internet, it’s far easier to compare rates on your own than it was in years past. By carefully considering your own needs and individual situation (such as being a veteran or having a lower credit score), you can search for lenders that fit your criteria, whether you decide to contact lenders on your own or work with a broker.