When it comes to getting a new home, starting a business, or covering emergency costs, many of us will seek external financing sources. While many of us have set aside funds for big projects and rainy days, these funds often fall short, leading us to turn to lenders for financing options.
The terms direct lender (DL) and mortgage broker (MB) will become significant terms and part of your options when it comes to obtaining loan financing. Before you jump to one option, it is important to know what a direct lender and a mortgage broker are and how they differ from each other. This way, you’ll have a better idea of how to obtain your loans and which one works best for you.
Here, we’ll explore the key differences between DL and MB to help you make good financing decisions.
As the term implies, you get the loan directly from the lending institution. There is no need for your loan to go through intermediaries like mortgage brokers (which we will discuss later), private equity firms, or banks. This is a convenient option when it comes to home loans because direct lenders have staff and representatives that handle various stages of loan processing, such as credit checks, underwriting, processing, closing, up to handing over the final check. It can serve as a one-stop-shop for home loan needs.
Direct Title Loan Lenders
Another notable type of direct lending option is the title loan, also known as a car title or auto title loan. Although the amount you can borrow is limited and has a short-term payment period, it is still a fast and reliable way of securing funds that are immediately needed, especially for emergencies and incidents that need quick financial action. One of the main reasons why the title loan is among the top loan options of many people in the U.S. is that there are many direct title loan lenders who offer direct deposit fund transfer to the checking accounts of their clients, often releasing the loan within the same day. There are also title loan lenders who offer overnight checks for next-day loan releases, which still a fast loan release option.
Banks are also prime examples of direct lenders. Most banks offer in-house underwriting services, without the need for a broker or middleman. They also close loans with their funds and offer their services directly to consumers. Bank of America and Chase are the most known examples of banks that offer direct lending services, but there are also local banks that offer the same services.
The mortgage broker is a financial professional specializing in bringing lenders and borrowers together. They serve as intermediaries by communicating with both the borrower and the lender about updates and developments regarding the loans to be processed. One thing to note here is that mortgage brokers are not lenders and do not use their funds to close loans.
A reliable mortgage broker is knowledgeable about many types of lenders, available lending institutions, and their offered services. They should also know the different loan types offered by lenders and the conditions in applying for these loans. They will also take into account the borrower’s income, tax returns, asset, and investment details, and credit reports to assess how much a consumer can conveniently borrow and which lending company is the best match for the consumer.
How Mortgage Brokers Assist You
A good mortgage broker can significantly expand your loan options by shopping for various lending services on your behalf. You also save time and effort and focus on other important concerns. They offer personalized services, taking into account your financial situation and credit history, and finding a lender that has loan products that are tailored for your situation and paying capacity. Many mortgage brokers have well-established relationships and connections with various lenders. They can make these connections work to your advantage by helping arrange for competitive and reasonable interest rates and terms.
How Brokers Are Paid
Mortgage brokers charge a fee of usually 1% of the loan amount. The borrower or the lender will pay for their commission, depending on the finalized agreement. You need to ask for the fee that your prospective will charge and who will pay for it to have a smooth working relationship with your broker.
Key Differences Between a Direct Lender and a Mortgage Broker
One of the key areas a direct lender and mortgage broker differ in is the method of compensation. As discussed earlier, a mortgage broker is compensated on a fee-based schedule, through fees, commissions, or both. In many cases, the loan origination fee charged by the bank is the broker’s source of payment. The origination varies with the loan amount, but since the compensation of brokers is tied to successfully closed loans, mortgage brokers are motivated to give the best service they can.
Direct lenders charge the borrower through different charges and fees. There’s still the loan origination fee, but this time, it goes to the lender directly. Other sources of compensation for direct lenders include late fees, interest earned on the principal balance, and other charges indicated in good faith Estimate (GFE) provided by lenders.
The application process is another key difference when done through a mortgage broker or a direct lender. You apply directly with a direct lending company without the need for a broker or a middleman. To get the best loan terms and payment options, research on the direct lender before applying.
The mortgage broker is a licensed professional who collects and delivers your mortgage application and supporting documents. They will then serve as an intermediary on the communication between the borrower and the lender. They do not have control over the loan processing timeline, guidelines, and approval, but they can provide tips and advice on how to improve your approval chances.
Both direct lenders and brokers are good options for getting a much-needed loan for your home, car, business, or emergency needs. They can also serve as one-stop-shop options for consumers due to the variety of services and loan products a consumer can have access to, and their applications are taken care of for them. Still, the decision on which service works best ultimately lies with the consumer.