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Broker or direct lender? This is a question that many buyers ask me regularly. Whether it is for the purchase of an apartment building or a single-family home, the choice between the two can be difficult to make. Both can get you the cash to make the purchase, but they each work differently with you to make it happen.
Simply put, a direct lender like a bank or credit union works directly with you to approve and fund the loan while a broker works with you in the form of an intermediary 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 works with you to secure it.
Related: Choosing the best mortgage lender for you
How a broker works
A broker acts as an intermediary between you, the borrower and the lender. Remember that the broker does not offer loans directly, but rather helps you compare possible lenders based on your financial situation. This last part is what makes a broker such an attractive option for borrowers.
The broker first meets with a client and discusses his needs in relation to the desired amount and the financial situation of the borrower. The broker collects all the relevant information and documents relating to the borrower’s income, tax returns, payslips, credit reports, investments and all other elements to better understand his finances.
From there, the broker analyzes all this information and puts together a series of quotes from lenders ready to lend the desired amount of money to eligible borrowers according to their criteria. This is one of the biggest benefits of working with a broker, especially for those with less than perfect credit or patchy employment history. The broker already knows which lenders are willing to work with these types of clients, so he avoids a lot of wasted time by skipping lenders who won’t approve a loan and focusing only on institutions with a higher probability of success.
Related: How the mortgage market is opening up to brokers
How a Direct Lender Works
A direct lender is a bank or credit union. The borrower works directly with one of the lender’s loan officers through the application and approval process and everything that entails. This obviously simplifies the procedure for obtaining the necessary money because there is no middleman. The financial situation of the borrower remains under the same level of examination and in case of refusal, the borrower must start the whole process again with another lender.
Direct lenders will offer a number of loan programs, but these may be limited in what type of loan is most appropriate for the borrower and their needs. The lender will determine the borrower’s eligibility for the programs offered and explain what is appropriate according to the lender’s criteria. This means that a borrower may be eligible for one or more programs offered by the lender or even be eligible for other more advantageous loan programs that exist on the market but that the lender does not offer.
Working with a direct lender limits you only to the programs offered by that lender. A broker, on the other hand, will always offer the widest possible range of eligible loan programs from all lenders involved.
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Fees and pricing
Working with a broker can lead to higher fees and more costs. This is due to all the work and access a broker provides you. The broker essentially does all the comparisons for you, identifying lenders who can provide you with the right program for your particular needs. Some of these loans can get quite complex and the more complicated the loan, the more expensive it can become to approve.
A broker must always disclose the compensation he receives in advance. Many of them are willing to work with borrowers and the costs are more negotiable than with a direct lender like a bank.
Direct lenders do not need to disclose how much they earn on your loan. This is why intense comparison shopping is important. You could end up paying a lot more on a loan program that was available to you for less elsewhere. Yes, you may have some leeway to negotiate a lower cost, but that’s not always guaranteed and a higher credit score will almost always have a bigger influence on that possibility.
Related: What It’s Like to Work With a Business Loan Broker
Which is best for you?
If you have excellent credit and your finances are in order, a bank is probably your best bet, especially if you’ve been a long-time customer of that institution. They know you, you know them, and they may want to reward your business with favorable loan rates and terms.
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 solution.
Your financial situation is not the only factor to consider. The same goes for the type of property you want to buy. Some lenders will only work with consumers who want to buy single family homes and not those who want to buy an apartment building or a co-op. A broker already knows the lenders who work with borrowers to buy specific types of properties. This is part of the reason brokers 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, expected fees and costs, and the willingness to do more work yourself before committing to one. broker or direct lender. for your loan.