What’s the difference between a lender and a broker?

When you are shopping around for the best mortgage, it can be tough to figure out if you should go with a mortgage broker or a mortgage lender.

Both brokers and direct lenders are mortgage professionals who work to help you finance or refinance a home loan. Choosing one or the other really depends on your personal situation and preference, but it's wise to go with someone local, says Kurt Johansson, senior loan originator at Shelter Mortgage in Nashville, Tennessee.

"I believe it's always best to go with a local lender, so you have a face and a point of contact to deal with during the mortgage process," says Johansson. 

Here are some of the main differences between brokers and lenders:

How they operate

Think of mortgage brokers as middlemen. They have a range of lending sources and may deal with up to 10 wholesale lenders to find a loan for their clients, says Jack Guttentag, professor emeritus of finance at the Wharton School of the University of Pennsylvania. 

While they don't lend money, brokers do have the ability to shop around on behalf of their clients. And not only do they handle the interactions with lenders, they also do all the paperwork for you.

Of course, because they're the middlemen, brokers have to send off loans to be underwritten and closed on, says Johansson.

Direct lenders, on the other hand, are more of a one-stop shop. "We do all processing, underwriting and closing functions in-house," says Ray Rodriguez, regional mortgage sales manager for TD Bank in New York City.

What does that mean for a prospective borrower? Brokers offer more options, while direct lenders have more control from start to finish and may make the process a little more straightforward, says Johansson.

Regulations

One of the biggest differences between lenders and brokers is that lenders are fairly chartered, says Rodriguez.

"We actually have to subscribe to more regulations than the mortgage broker," he says. That can be a good thing.

Rodriguez says that because they are federally regulated, they are even more diligent about dotting every "I" and crossing every "T." They don't want to get hit with big fines if they do something wrong.

That's not to say that mortgage brokers aren't just as diligent.

Mortgage brokers are licensed state-by-state. And they subscribe to the requirements of each individual state, notes Rodriguez.

Licensing

"Brokers must be licensed in any state in which they originate loans, so most are limited to one or a few states," says Guttentag.

Direct lenders must also be licensed in any state where they originate loans, but most of them lend in multiple states, he says. And national banks, of course, can lend in all 50 states.

If you're looking for an out-of-state loan, you could be better off going with a national lender.

But Guttentag says that most prospective borrowers won't have to worry about it, since the lenders you come in contact with will be those who can lend in your area.

Flexibility

Mortgage brokers are generally subject to the raw guidelines of their investors, while direct lenders are able to make their own judgments.

That gives direct lenders a little more flexibility when it comes to approving borrowers, says Rodriguez. "We do have this flexibility to move around our own guidelines, depending on the customer and how we feel about the overall transaction.”

That's undeniably a plus. Flexibility can be especially beneficial in situations where a subjective decision or small exception is required.

Additionally, direct lenders have the power to offer breaks on mortgage rates or loan products that brokers may not have access to, says Rodriguez.

Much of that is due to the fact that banks are looking to develop a long-term relationship with a customer. "There's a value to us to gain a customer," he says. Those seeking a loan may open a checking account, a savings account or a credit card, for instance.

After closing

One often overlooked difference between brokers and lenders is what happens to the loan after closing.

Brokers sell their loans off to investor after the loan closes, says Johansson. And those loans may get sold again.

While the borrower may know who is servicing their loan, they may not know how or who to contact, says Rodriguez.

Direct lenders, alternatively, service all of their own loans. If a customer has a concern about the escrow or principal on their loan, they can simply walk into a branch and ask, Rodriguez says.

Mortgage fees

Guttentag says that there isn't a major difference between what mortgage brokers charge to originate a loan versus direct lenders.

However, it's important to ask about fees and compare costs. Your mortgage lender is required to provide you with the CFPB’s "Loan Estimate" form three business days after submitting your loan application. It details your loan terms, expected fees and closing costs. Also, three business days before closing, your lender is required to provide you with the CFPB’s “Closing Disclosure” form.

Next steps

Shopping for a mortgage? Compare current mortgage rates from mortgage lenders and mortgage brokers in your area.