Direct Lenders vs Mortgage Brokers vs Banks

The major differences between the main mortgage providers, and which to pick depending on your situation.

What is the difference between a mortgage direct lender and a mortgage broker?

A direct lender is a mortgage company that uses its own funds to lend to borrowers. Typically direct lenders have large lines of credit. They can originate loans, and be in charge of the disclosures, underwriting, document drawing, and funding in-house.

The loans that are funded on the line of credit are typically packaged and sold to a bigger purchaser which can be direct to Fannie Mae, Freddie Mac, GSE institutions or another direct lender that is larger in size.

Most direct lenders are split into two categories: non-delegated correspondents (underwriting is sitting at the investor that is set up to purchase the loan(s)), and delegated correspondents (underwriting, rep, and warrants are responsible in-house).

A mortgage Broker is a middle-man company that connects borrowers with lenders. Brokers do not use their own funds to lend to borrowers, they are going through a wholesale channel.

Brokers are essentially used as a marketing channel to bring business, they are given rates cheaper than the retail channel. Brokers are responsible for managing the relationship with the customer and the lenders are in charge of operations end of the loan. Brokers usually shop around with multiple lenders to help find the best deal for the borrower.

What is the benefit of a direct lender?

Direct lenders often close faster and can get cheaper rates than most of the market. They can set lower margins to be more competitive and bring in business.

Is it better to go through a direct lender, bank, or broker?

The answer isn’t so clear and there is no winner. I would shop around allowing a broker to check options, have two direct lenders also give you a quote, and one local bank to see what the options are. Some borrowers might have limitations on their file which will make your file more difficult.

Why go to a mortgage broker instead of a bank?

Mortgage Brokers can shop different banks and lenders to fit the borrower in the best possible deal. This takes time, energy, and effort, therefore making it worthwhile for them to set an origination fee.

How does a direct lender make money?

All lenders make money from YSP (yield spread premium) either charged upfront in the form of origination, discount, or fees called points.

The end-owner of the mortgage will pay brokers and lenders to originate loans and that fee is called YSP, often paid to them in the form of bps (basis points).

1% = 100bps.

Each broker, lender, and bank will set a bps structure, mostly ranging from 80-150bps (.8%-1.5%) on each loan.

Do mortgage brokers get better rates?

Mortgage brokers are essentially marketing channels that will bring customers to banks and direct lenders, therefore, they are given cheaper rates through a wholesale channel. It’s conducted in this fashion to not conflict with the bank/direct lender retail channel.

Do mortgage brokers charge a fee?

Mortgage brokers charge points called origination fees, an upfront fee that is charged to process a loan application.

Is a direct lender the same as a bank?

Direct Lenders are called non-depository institutions which do not have checking, savings, or investments accounts. They hyper-focus only on mortgages and no other product. The benefit of this is that they typically have better rates than a depository bank but they often have liquidity issues because the lines of credit that they use to fund loans need to be replenished.

Banks that have depository capabilities do not need to have someone buy loans from the line of credit because they have funds they can lend with and keep on the balance sheet. Retail Banks will have certain types of loans they want to “gobble up” therefore offering very low rates and fees to keep the current customer base happy.

For example:

If a retail bank is known for having a lot of customers in the entertainment industry they will tailor Jumbo loans, or a type of loan that the entertainment customer base will like, to maintain and attract those types of relationships.