Achieving a home financing goal is a momentous occasion, but with many options and so much information available, it may be hard to know where to begin. Most people are referred to mortgage brokers, banks, and direct lenders, but they don’t know the differences. Read on to learn the Benefits of using a direct lender.
What Does a Direct Lender Do?
Most borrowers have heard the terms mortgage lender, direct lender, and mortgage banker, and while they sound a bit different, they mean essentially the same thing. A direct lender is simply a lender or bank that works with homeowners directly without the need for a broker or middleman. Direct lenders fund home loans, and once those loans are funded, they’re sold to Fannie Mae, Freddie Mac, and private investors. In some instances, rather than selling mortgages, the direct lender will keep them and act as a loan servicer, taking monthly mortgage payments.
What Does a Mortgage Broker Do?
By definition, a mortgage broker is a go-between who brings home buyers and mortgage lenders to the bargaining table but does not use their own money to fund mortgages. The mortgage broker takes the borrower’s paperwork and passes it to the home lender for underwriting and potential approval. In short, a mortgage broker is the home loan industry’s middleman.
Why Should Buyers Work With Direct Lenders?
There are numerous benefits of working with a direct mortgage lender. Costs and interest rates are typically a bit lower with these lenders than with mortgage brokers. While pricing may vary slightly between brokers and lenders, the expertise, knowledge, and dedication of an experienced mortgage originator are crucial to the success of the home buying process.
Working with a direct lender gives a buyer access to more loan options than would be found at a brokerage or a bank where they will only lend based on an in-house program. If a bank or broker lends outside of those parameters, there’s typically an overlay. With the overlay, underwriting guidelines are stricter than those imposed by government lending programs. However, direct lenders usually have minimal to no overlays, and they lend money based strictly on the VA’s, FHA’s, Freddie Mac’s, and Fannie Mae’s underwriting guidelines. Below are several more reasons to think about working with a direct mortgage lender.
- Increased speed: Because operations are done in-house, from processing and underwriting to mortgage funding, direct lenders can usually close mortgages quickly.
- Licensing: Many large direct mortgage lenders are licensed nationwide, which means they can help buyers from any state. Therefore, if a borrower is considering buying a home in another state, direct lenders are a great source of help.
Direct Lenders Offer Increased Flexibility
A direct lender can often approve a mortgage that a larger lender won’t or can’t because of the above-mentioned differences in lending guidelines. Big lenders need to process large numbers of home loans efficiently, and to do that, they must have strict guidelines that allow them to quickly identify eligible borrowers. On the other hand, direct lenders often focus on small market niches such as self-employed and bad-credit borrowers. While a large lender tends to pass over non-conforming loans because of the effort needed to determine a borrower’s eligibility, direct lenders know how to handle them.
When seeking a home loan, borrowers should take the time to evaluate their options. Reading this guide is a great first step, but if a borrower is still undecided, it may be beneficial for them to shop around between different brokerages, banks, and direct lenders. With research and comparison shopping, borrowers can find the right loan products.