Mortgage broker vs. bank: Which should I use?

A couple and their mortgage broker are seated at a table discussing loan options.Image: A couple and their mortgage broker are seated at a table discussing loan options.

In a Nutshell

Not sure whether you should go with a mortgage broker vs. bank for your home purchase? If you need help shopping around, a mortgage broker could help you compare options with many different lenders. If you’re already loyal to one bank, or if you want to shop around on your own, going with a direct lender could be the better choice.
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While shopping for a mortgage, you may find loan services offered by banks and by mortgage brokers — but what’s the difference between the two?

The difference between brokers and banks comes down to who actually finances the purchase when you borrow money to buy a house.

Banks and direct lenders are companies that loan money for a home purchase. Mortgage brokers are service providers that help borrowers find and apply for loans — but they don’t actually loan you the money.

Let’s look at how each one works and how to decide which might be the right choice for you.

What is a direct mortgage lender?

A bank or direct lender is a financial institution that you can borrow money from directly to purchase a home. In addition to banks, some credit unions and other mortgage lenders underwrite loans for homes as well.

The types of mortgages you may be able to get from banks or direct lenders can vary. Some lenders may specialize in certain mortgages, such as VA loans for veterans. Other mortgage lenders offer different home loans — such as USDA loans, VA loans and FHA loans — along with conventional loans and jumbo loans.

What is a mortgage broker?

A mortgage broker is a third party that connects buyers with potential mortgage loans. Their job is to help homebuyers shop around and weigh loan options with various lenders.

Mortgage brokers can also help you apply for mortgage preapproval and forward important documents to the lender on your behalf. If the lender’s underwriters approve you, the mortgage broker may orchestrate the signing and closing of the loan.

One thing to note is that sometimes direct lenders can double as mortgage brokers for certain loans. So even if you think you’re doing business directly with a lender, it could be a good idea to ask what role they are playing in the mortgage process.

A good mortgage broker will be your advocate looking for the best possible terms. But some brokers may send you to their preferred lenders, even if those lenders aren’t offering the best deal.

That’s why it’s important to research mortgage brokers and compare your options before using one to make sure you choose a reputable company. It’s also a good idea to do your own research into the loan options they provide because you could end up finding better terms and lower fees elsewhere.

Mortgage broker vs. bank: Which is better for you?

If you already do business with a bank or credit union, applying directly with that institution for a mortgage instead of working with a broker could be worth considering.

You could avoid broker fees going this route, and some financial institutions offer benefits like discounts or reduced fees for existing customers who apply for mortgages. Also, your financial institution might have access to information that can be used to auto-populate forms, making it easier to complete loan documents.  

In circumstances where you don’t have ties to a specific bank or credit union, using a broker could help you weigh a number of options across many different lenders to find the best fit. This extra help could save you time and legwork after putting in an offer.

Is it better to get a mortgage through a mortgage broker?

Getting a mortgage through a mortgage broker may be easier in the sense that you have someone helping you compare rates and handle the mortgage application process.

But when it comes to eligibility criteria, you’ll still need to meet minimum credit, income and debt-to-income ratio requirements to get approved. The broker prepares your loan application, and that application is run through loan underwriting like any other loan.

That said, a mortgage broker may be able to point you to loans that could fit your credit profile, but it’s not necessarily safe to assume you’re getting the best deal. Loan officers at banks and other direct lenders can play a similar role by explaining the different loans available.

This could include loans with low down payments and loans that come with less-stringent credit requirements. But if you have credit issues, you may have to improve your credit before you can work with a bank or broker.

How does a mortgage broker make money?

Typically, brokers earn a commission for their services, and the fee may be referred to as “points.” These mortgage points are a percentage that may be paid by you at closing, added to your home loan balance or added to your interest rate.

The broker’s fee can vary and is one of many homebuying-related fees that you should ask about and negotiate. Don’t feel as if you have to commit to the first or even second mortgage broker you consult with about loans if you’re not comfortable with the fee.

Exploring your options might pay off in upfront, monthly and/or long-term savings if it helps you find a broker or direct mortgage lender who can help you land a competitive rate on a home loan.

Next steps

When comparing mortgage brokers or direct lenders, one option isn’t necessarily better than the other. Each has its own advantages, depending on the company and your home loan needs.

A mortgage broker may charge a fee like a real estate agent, but they could also save you time and stress by presenting you with various loan options and advising you through the home loan process. Going with a direct lender could help you avoid this fee, but it’s a good idea to ask about any other applicable fees that might be similar.

Whichever option you go with, looking at quotes from several lenders and multiple brokers can help you land the best deal for your situation.

About the author: Taylor Medine is a freelance writer who’s covered all things personal finance for the past seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt and building credit. … Read more.