It is common for most people to be unfamiliar with the terms associated with a mortgage application process. One such term is “direct lender.” Is a direct lender any different from your typical mortgage lender? Who do you approach when you’re ready to start your mortgage application?
Direct lender and mortgage broker explained.
A direct lender (also a mortgage lender) is a professional capable of extending loans to you directly. On the other hand, mortgage brokers are primarily concerned with getting quotes from many lenders to enable you to compare the rates on offer. Brokers do not lend money. Instead, they work hand in hand with lenders to provide the client with options.
So who do you engage when applying for a mortgage? Well, it all depends on you. Even though each of these professionals works to realize the same goal, their method of operation differs in some ways. Here is a breakdown of the varying aspects between mortgage brokers and direct lenders. Hopefully, this guide will simplify your decision-making process.
Who is a direct lender?
Put simply; a direct lender refers to any professional who can grant you a mortgage. Direct lenders can be individuals, financial institutions, commercial banks or anything in between.
When you apply for a mortgage through direct lenders, they will handle the following functions; application, terms of the loan, loan processing, underwriting, and loan closure. In such a case, the lender is directly involved in your mortgage application process.
Differentiating a direct lender from a bank
Note that there is a significant difference between a bank and a direct lender. Direct lenders primarily deal with mortgage-related transactions while commercial banks can facilitate a multitude of loan services. Direct lenders are better suited to overseeing mortgage transactions than banks.
Also, banks tend to have inflexible terms and guidelines relating to mortgages. Entities with a low credit score will find it easier to negotiate with direct mortgage lenders than they would with banks. Banks place stringent requirements on companies with poor credit ratings making it harder for such firms to access funds.
Benefits of dealing with direct lenders
First is the fact that direct lenders are better placed to deal with any issues that might crop up during the application process. In most cases, direct lenders tend to process applications faster and better than mortgage brokers.
Secondly, is the nature of practicing licenses offered to such individuals. Direct lenders can operate in any state countrywide whereas brokers are limited to only a few states. This issue can cause problems when acquiring property in a jurisdiction where your broker is not permitted to practice. It makes sense to work with direct lenders to avoid such unnecessary hitches.
Shortcomings of direct lenders
If you decide to make your application through a mortgage lender, you will have to make individual requests to all lenders you intend to compare.
This process involves filling out numerous forms as well as verifying incomes, providing creditworthiness reports and making multiple phone calls. Such an exercise can be time-consuming and stressful especially for persons on a tight schedule.
It’s also quite likely that you will encounter a considerable variation in rates and terms because each lender is unique.
Who is a mortgage broker?
Unlike direct lenders who can be institutions, mortgage brokers are primarily individuals who are responsible for collecting quotes from numerous lenders and presenting them to a potential buyer for review. Indeed, mortgage brokers perform the role of intermediaries thus providing the linkage between a mortgage applicant and a lender.
Mortgage brokers will perform tasks such as application and loan processing.
Benefits of going through brokers
The most notable benefit is down to the fact that you only get to deal with a single person (the broker) during the entire application process. Brokers being the middlemen they are, tend to interact with many lending sources on behalf of the client.
Brokerage is helpful because it eliminates the trouble of having to deal with different lenders. However, this option does have its fair share of downsides.
Going through an intermediary can lengthen the time it takes to close a loan deal. Apart from being time-consuming, you will also have to foot brokerage fees in the form of loan processing costs.
Secondly, since most brokers receive payment via commissions, it means that they will most likely drive up the purchasing fee to rake in more money. Ultimately, you will be paying brokerage fee on top of the actual lender’s fee. This issue makes dealing with brokers an expensive affair.
Similar to a loan officer in a lending facility, mortgage brokers make money when you decide to go through with a mortgage plan. Brokers will command a final fee depending on the mortgage you select.
Finally, the belief that mortgage brokers offer better rates than direct lenders is false. In reality, mortgage rates tend to reflect what goes on in the market. Indeed, all lenders derive their prices from the common market. What this means is that interest rates tend to be comparable regardless of whether you are dealing with a broker or a direct lender. Even where differences arise, the variation is usually insignificant and is unlikely to affect your monthly payments severely.
In summary, the fact that a broker acts as an intermediary means that your application will take more time and cost more than when dealing directly with lenders.
It’s your choice
Ultimately you decide whether to go the intermediary way or deal with lenders individually. Your choice will depend on your needs and your current situation.
Each method has its benefits and shortcomings. However, the goal is always to get quotes from either source to guide you in making a reliable mortgage decision.
Thank you for the DLC Origin Mortgages for this outstanding post on mortgage brokers vs. direct lenders.
You can find them at their offices in Vancouver here:
DLC Origin Mortgages
2608 Granville St #550, Vancouver, BC V6H 3V3