Should I use a mortgage broker or retail lender?

The first decision you must make when you're applying for a home loan is whether you will use a mortgage broker or retail lender. This article explains what they are and can do for you in the home buying or refinance process.
Positive trader consoling customer about financial assets

You’re buying a home, and it’s time to apply for a mortgage. Where do you go? Google “get a mortgage” or “mortgage application” and you’ll find a variety of search engine results. You’ll likely see large bank retail lenders (think Bank of America or Wells Fargo) or other online financial retail lenders like Quicken Loans listed at the top and some ads for mortgage brokers. Where should you click? Which one do you choose? 

If you’re new to the mortgage process, it helps to know the difference between these two options and what it means for you. Let’s start by clarifying the definition of lender and broker.

A lender is a financial institution or business that provides the money for the loan or refinance. They are the ones who actually supply the money and set the terms of the loan, including interest rates and the qualification requirements.

A mortgage broker is a third-party agent that works with multiple lenders. Brokers are licensed and regulated professionals. They don’t lend the money, but they do help the borrower find a lender who will offer the best rates and terms. Brokers work with wholesale lenders.

Wholesale vs. Retail

Wholesale lenders are financial institutions that provide loans via third parties (mortgage brokers, other banks, credit unions). They market their loan programs to mortgage brokers or loan officers. They do not deal directly with the borrower. The broker shops around to find the home buyer the best rate

Retail (direct) lenders work directly with the borrower. They handle every aspect of the loan process in-house. The loans they “sell” are products of their financial institution (some large banks do have retail and wholesale operations). On the retail side, the lender issues the loan directly to the home buyer. If the home buyer wants to compare rates, they can shop around with different retailers and possibly try to negotiate.

What does this mean for you, the customer?

When you start the home buying process, you need to decide where you will go to get preapproved and get a mortgage. Ultimately, you want to get the best rate and terms possible for your home loan or refinance.  Here are your options.

Using a retail lender:

There are few ways to go about the mortgage process with a retail lender. You can to your bank or a large online retail mortgage company, apply for a loan, and simply accept the loan terms and rates they offer. Or, it could mean going to multiple retail institutions to shop the rates, so you can compare offers and try to negotiate. In this case, you need to know the strength of your credit, the mortgage terms and rates you want, and your loan options.  If you do go to multiple retailers, you may have to go through the application and approval process several times. Some people think cutting out the middleman (the broker) will save them money (broker fees). This really depends. Shopping around takes time, and for most people time is money.

Using a mortgage broker:

When you work with a mortgage broker, the broker navigates the loan process for you. This can save you time. From preapproval documentation, to application, to the underwriting process, the broker guides the borrower through. More importantly, the broker uses their knowledge of the industry to shop the rates and loan options. Brokers have access to multiple wholesale lenders and aren’t locked into one lender or loan product. This works to the borrower’s advantage. The wholesale lender may offer discounts to the broker for bringing them the business. This can translate to a better rate for the borrower which translates into savings for the borrower.

So, where’s the catch? How do they get paid? Brokers can earn a borrow or lender fee that’s anywhere from .50% – 2.75% of the total loan amount. The broker’s fee structure and who is paying determines the amount. This fee is typically rolled into the loan amount or loan fees.

When it comes to shopping for a mortgage, you either pay with your time and by doing the legwork yourself in the retail market, or you pay a broker do it and be your one-stop-shop.

Other things to consider:

Large online retail mortgage lenders often have streamlined online processes. This is appealing to borrowers raised in an online world. As with any large online institution, what you gain in online ease, you may sacrifice in personal service. When your loan is processed, you won’t always speak to the same loan processor. This is the case even with large banks that have local branches. In addition, these financial institutions are paying for their brick and mortar which means that cost is passed on to the consumer in some way.

That isn’t to say that mortgage brokers don’t have time saving online processes or all mortgage brokers are created equally. Any mortgage broker worth hiring has an online process and offers online pre-approval these days. If you’re looking for personal service and someone to keep the loan process on track, then a broker may be the right option for you. Ask for a referral from your real estate agent or look into a locally and independently owned brokerage.

Mortgage Broker Retail Lender
Third-party agent who brings borrowers and lenders together. Does not finance the loan.
Finances the mortgage loan
Does the research and legwork of shopping the rates and loan options for you
Offers their terms and their rates
May charge a fee
Covers costs through a variety of fees and charges
Works with the lender and the borrower throughout the loan process
Works directly with the borrower
Gathers important documents from you to help with the pre-approval process and provides a preapproval letter
Handles approval. May be able to speed up the process.
Has no allegiance to one lender over another
Has a vested interested in selling their loan
Can help borrowers who have a hard time getting approved through direct lenders

Bottom Line: Do you want to spend the time shopping for rates or have someone else do it? Are you looking for someone who will help navigate the home loan process, or are you comfortable with staying on top of the large retailer and their processes? Buying a home is a major investment. You’re looking for the lowest rate and best terms as compared to other lenders. Take time to decide what other aspects of the process are important to you.