Mortgage Direct Lenders Vs. Brokers
Capitalism drives the competitive mortgage marketplace. Direct mortgage lenders and mortgage brokers compete for business from homeowners who refinance and homebuyers who require a mortgage when purchasing a home. Both business models succeed due to the distinct advantages each one provides. Each type of mortgage lender also has weaknesses, which serve to hold them back. Choosing one over the other requires knowing what you want in a mortgage company and who provides most of what you are looking for.
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Licensing
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Direct mortgage lenders include both federally regulated banks and mortgage lenders. The federal government, through the Federal Deposit Insurance Corporation (FDIC), the Comptroller of the Currency and the Federal Reserve Board, regulates banks. Usually, the states regulate direct mortgage lenders that are not banks, and mortgage brokers. Some states require licenses for loan officers regardless of where they work; others do not require licenses for any loan officer who works for a bank.
Source of Funds
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Mortgage lenders close the loans in their own name and provide their own funds at closing. If you choose a mortgage lender and sign your application with a mortgage lender, then you will see the mortgage lender's name on the note at closing. Mortgage brokers do not close loans in their own name, but in the name of the bank they brokered, or presold your loan to. The closing documents will reflect the investor in the loan, not the mortgage broker. This is one of the key differences between direct mortgage lenders and mortgage brokers.
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Programs
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Direct mortgage lenders often only have their own mortgage programs. The banks only lend on their programs and no others. Mortgage brokers enter into agreements with multiple, usually dozens, of mortgage investors. These agreements allow the mortgage broker to arrange loans for the mortgage investors instead of the investors finding their own borrowers. Mortgage brokers provide more choices for loan programs to the borrowers because they can shop the loan through many different companies' loan programs. Direct mortgage lenders may have specialized loan programs only available to them that are not available to mortgage brokers.
Servicing
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Direct mortgage lenders sometimes service, or receive payments and provide customer service on, the mortgage loans they close. Mortgage brokers never service loans. The borrower may go to the bank where the loan officer works and make a payment. The same borrower cannot go to the mortgage broker's office to make a payment on the mortgage loan. The mortgage broker does not have any ability to apply the payment to the mortgage. It's the investor who owns the mortgage, not the broker. Sometimes. lenders sell the mortgage loans to larger lenders and investors shortly after close.
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