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Broker or direct lender? It’s a question many buyers ask me on a regular basis. Whether it’s for the purchase of an apartment building or a single-family home, the choice between the two can be tough to make. Both can get you the money needed to transact the purchase, but they each work with you differently in order to do it.
Simply put, a direct lender like a bank or a credit union works with you directly to approve and fund the loan while a broker works with you in the form of a middleman to help you find the best possible lender for your particular situation. Once that lender is identified, you begin the application process with that institution. The thing to remember is that a broker does not fund the loan but they work with you to secure it.
How a broker works
A broker works as an intermediary between you, the borrower and the lender. Remember, the broker does not offer loans directly, but instead helps you comparison shop between possible lenders appropriate for your financial situation. That last part is what makes a broker such an attractive option for borrowers.
The broker first meets with a client and discusses his or her needs with respect to the amount desired and the borrower’s financial condition. The broker gathers all of the pertinent information and documents related to the borrower’s income, tax returns, pay stubs, credit reports, investments and all other elements that provide a clearer picture of their finances.
From there, the broker analyzes all of that information and gathers a series of quotes from lenders who are ready to loan the desired amount of money to qualifying borrowers under their criteria. This is one of the biggest benefits of working with a broker, especially for those with less than perfect credit or sporadic employment records. The broker already knows which lenders are willing to work with these types of clients, so it cuts out a lot of wasted time by skipping lenders that won’t approve a loan and focusing solely on those institutions with a higher likelihood of success.
How a direct lender works
A direct lender is a bank or a credit union. The borrower works directly with one of the lender’s loan officers throughout the application and approval process and all that entails. This obviously simplifies the procedure to get the money needed because there is no middleman. The financial situation of the borrower remains under the same level of scrutiny and if denied, the borrower needs to begin the whole process all over again with a different lender.
Direct lenders will have a number of loan programs that are offered but these could be limited with respect to the type of loan that is most appropriate for the borrower and his or her needs. The lender will make a determination of the borrower’s eligibility for the programs that are offered and explain which is appropriate under the lender’s criteria. That means a borrower may qualify for one or more programs offered by the lender or even qualify for other, more beneficial loan programs that exist on the market but the lender does not offer.
Working with a direct lender limits you only to which programs are offered by that lender. By contrast, a broker will always offer the widest possible range of qualifying loan programs from all applicable lenders.
Fees and pricing
Working with a broker can bring with it higher fees and more costs. This is due to all of the work and access a broker provides to you. The broker is essentially doing all of the comparison shopping for you, identifying which lenders can provide you with the appropriate program for your particular needs. Some of these loans can get pretty complex and the more complicated the loan, the more costly it can become to approve.
A broker should always disclose the compensation they are receiving upfront. Many of them are willing to work with borrowers and the costs are more readily negotiable than with a direct lender like a bank.
Direct lenders do not need to disclose how much they are earning on your loan. This is why it’s important to do some intense comparison shopping. You could pay a lot more in the end on a loan program that was being offered at a lower cost to you someplace else. Yes you may have some wiggle room to negotiate a lower cost but it’s not always guaranteed and a higher credit score will almost always be a stronger influence on that possibility.
Which is best for you?
If you have an excellent credit score and your financials are in order, a bank is likely your best bet, particularly if you have been a customer in good standing with that institution for a long period of time. They know you, you know them, and they may wish to reward your business with favorable rates and conditions of the loan.
On the other hand, if you are dealing with less than perfect credit or other difficulties in providing a clear and complementary picture of your financial situation, a broker may be the way to go.
Your financial situation isn’t the only factor to consider. So is the type of property you wish to purchase. Some lenders will only work with consumers who want to buy single-family homes and not those who wish to purchase an apartment building or a co-op. A broker will already have the knowledge about which lenders work with borrowers to purchase specific types of properties. This is part of the reason why brokers will sometimes charge more for their services.
It’s up to you, the borrower, to weigh all of these options, the pros and cons of each, the fees and costs anticipated, as well as the willingness to do more of the work yourself before committing to either a broker or a direct lender for your loan.