The difference between mortgage lenders and mortgage brokers

by Adam Krause, Contributor

If you are new to the real estate market and you’re doing some preliminary homebuying research, you may see ads for mortgage lenders and mortgage brokers. It is important to realize that these two terms are not interchangeable. Understanding the fundamental differences between mortgage lenders and brokers will help you decide which is best for you.

Mortgage Lenders vs. Mortgage Brokers

A mortgage lender is a bank or other financial institution (usually private) that issues mortgage loans directly to homebuyers. A mortgage broker, on the other hand, is an intermediary party that operates between the homebuyer and the mortgage lender. [See related article “Mortgage Lenders vs. Mortgage Brokers”]

Mortgage brokers generally charge a fee for their services, which is usually 1% to 3% of the loan amount. The issue with brokers is that they are paid based on a percentage of your mortgage, meaning they are somewhat incentivized to match you with a larger loan (which may be beyond your means). However, a small number of mortgage brokers will charge a flat fee instead. Although these brokers are less common, you may want make the extra effort to find them since it can save you a lot of money.

On the flip side, paying an extra fee for the services of a mortgage broker can have its advantages. The extensive network of contacts that brokers have with local mortgage lenders could help you find a loan program that was not being advertised, or that was not directly available to consumers without a broker involved. If the broker can match you with a loan that has a lower interest rate, lower down payment requirement, or better loan terms (than what mortgage lenders are offering directly), it may make the broker’s fee worthwhile.

Keep in mind, both the mortgage broker and the individual who works with you on behalf of the mortgage lender may have the title of “loan officer.” Therefore, make sure that you’re aware of which loan offer you are dealing with at any given time.

Although the majority of mortgages in the U.S. are issued through mortgage brokers, it is not absolutely necessary to use a broker to obtain a mortgage loan. There are many different types of mortgage lenders that loan directly to homebuyers (with no middle man, i.e. broker). Depending on the competitiveness of the housing market in that area, you can most likely approach the mortgage lender’s retail division directly and initiate the loan application process.

Since mortgage brokers aren’t paid until the loan is agreed upon and finalized, you may consider being in touch with multiple brokers at the same time. This way, you can have several people searching for home loans on your behalf, giving you a better chance to find a better deal.