Mortgage Brokers vs. Direct Lenders
Need help deciding which is right for you? The experts at Loans Canada break down the differences to help you choose.
While you can certainly apply for a mortgage with your bank, you may have more options available if you work with a mortgage broker.
So, what's the difference between mortgage brokers and direct lenders? Let's dive deeper into this topic to help you get familiar with the two, and ultimately make the right decision on which one to use when you're ready to apply for a mortgage.
What is a direct lender?
Direct lenders use their own capital to provide mortgages. These include banks, credit unions, and private lending companies.
Applying for a mortgage with a direct lender involves completing a loan application and providing the lender with all pertinent information and documentation, such as bank statements, tax statements, and letters of employment. The direct lender will also want to check your credit score to verify your creditworthiness.
Based on your credentials, the lender will quote a mortgage interest rate that you may qualify for.
Private mortgage lenders vs. Banks
Traditional banks and credit unions have more stringent lending criteria than private mortgage lenders. As such, it's usually easier to get approved for a mortgage with a private lender compared to conventional lenders.
More specifically, banks and credit unions are federally regulated in Canada. They must conduct a mortgage stress test to assess a borrower's ability to carry a mortgage for a certain amount and at a certain interest rate. These stress tests are meant to evaluate if you can afford your mortgage if interest rates increase in the future.
Many applicants are unable to pass these mortgage stress tests, leaving them without a home loan to finance a home purchase. Private mortgage lenders, on the other hand, are not regulated in the same way as banks and other A-lenders. As such, they are not required to conduct mortgage stress tests on applicants and are more likely to approve borrowers, including those with subpar credit scores in many cases.
That said, private mortgage lenders typically charge higher interest rates than banks and credit unions, making their mortgages more expensive. Loan terms are also typically shorter.
Advantages of using a private direct lender
There are plenty of reasons why homebuyers may want to apply for a mortgage with a private direct lender over a mortgage broker, including the following:
- Fast application and approval process. Direct private lenders have everything in-house and are not obligated to follow the same criteria as traditional lenders. Since they hold more control over their lending criteria, they're able to make quick funding decisions.
- Accept low credit. Banks and credit unions typically require healthy credit scores from applicants. Borrowers with credit scores under a certain threshold may find loan approval very difficult, if not impossible. On the other hand, direct private lenders place more emphasis on other criteria, such as your income, assets, and job stability. If your credit score is lagging but other factors are strong, you may still be able to qualify for a mortgage with a direct lender.
- No stress test required. Private direct lenders aren’t regulated the same way as A-lenders and banks and as such, they're not required to conduct the stress test. You can qualify with a lower credit score and won't have to be subject to this test to get approved.
Disadvantages of using a direct lender
Along with the perks of working with a direct lender are some drawbacks to consider:
- Less variety. Working with a direct lender means you're settling for what that particular lender has to offer. Unless you've already shopped around, you could be stuck with a lender that only has limited options in terms of loans and rates. A broker, on the other hand, has a network of lenders they work with, and therefore more options to choose from.
- Requires a lot of time and effort. A mortgage broker working on your behalf will take the time to find a lender that will provide you with the ideal loan for you based on your credentials. But without a broker, you're doing all this legwork yourself, which is very time-consuming and potentially full of headaches. You'll also be filling out several applications with different lenders, which could have a negative impact on your credit score.
- Multiple Applications. Every direct lender you apply with will require you to complete a full application. If your application is denied you'll have to start the application process all over again with a new lender.
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What is a mortgage broker?
A mortgage broker serves as the middleman between lenders and borrowers. They are not lenders and do not actually provide loans. Instead, they bring lenders and borrowers together.
Mortgage brokers have a large network of lenders within their circle. They'll get to know the financial and credit profiles of borrowers and find the right lender accordingly.
To help the mortgage broker find the right lender for you, you'd need to provide all the same types of documents as you would with a direct lender, such as bank statements, information on assets and liabilities, tax returns, and proof of employment. This information will help the broker assess how much you can afford in a mortgage.
Mortgage brokers help borrowers compare different lenders and provide several quotes. From there, you can decide which lender offers the best mortgage terms and rates. These professionals will serve as the communicator between borrowers and lenders, so any questions you have will be funnelled through your broker.
Rather than filling out several loan applications with different direct lenders, you would only have to fill out one. The broker will then use that one application to help you get approved for a mortgage.
Advantages of using a mortgage broker
Using a mortgage broker to find a lender has its perks, including the following:
- Save time. Instead of hopping from one lender to the next, a mortgage broker will do the shopping for you. This can save you a great deal of time and hassle.
- Find the best rate. Mortgage brokers will shop around to find the lowest interest rate for you based on your financial and credit profile. Plus, brokers typically have access to lenders who offer lower rates, which can save you a lot in interest over the life of your mortgage.
- No payment for their services. Most mortgage brokers are paid a commission from the lender that you ultimately apply with. There's no cost to you for using their services.
- More variety. Mortgage brokers have a wide range of lenders within their network, so they have access to a variety of rates, terms, and other loan features from various lenders.
- Unbiased guidance. Mortgage brokers don't work for lenders. Instead, they work for you. As such, they are not partial to a specific lender and instead are truly looking out for your best interests.
Disadvantages of using a mortgage broker
There are a few cons you should consider before choosing to work with a mortgage broker:
- Middleman involved. Depending on how you prefer to deal with lenders, having a middleman involved may not be a bad thing. However, if you're the type who prefers to deal directly with a lender, then having a mortgage broker in the middle might be a drawback for you.
- Not All Lenders Deal With Brokers. Some lenders may not work with brokers. If there's a specific lender you want to work with, you may have to deal with that lender directly on your own.
- Unfamiliarity With The Broker. If you have been dealing with a financial institution for a long time, you may feel more comfortable applying for a mortgage directly from that entity. Working with a broker you're unfamiliar with may make you a bit uncomfortable and hesitant to entrust them with your loan application.
Mortgage brokers vs. Direct lenders overview
The following chart will help you compare direct lenders and mortgage brokers to help you decide who to work with when you're searching for a mortgage.
Are they a lender?
Offers competitive rates by comparing different lenders
May not offer competitive rates
How to apply
Apply 100% online with some brokers within minutes
Apply and supply documents in-person
Large network of lenders to choose from
Individual lenders, which requires more legwork to find
How to choose between a mortgage broker vs. A direct lender
Both direct lenders and mortgage brokers can provide you with the ideal mortgage. Before you decide who to work with, find out what type of rate and loan amount you can get based on your financial and credit profile. Be sure to also look at the loan options available, and the terms that come with each loan product.
When to choose a lender
If you have a strong credit score and financials, you may have an easier time getting approved by any lender. In this case, working with a direct lender might make sense.
Lenders will provide you with an estimate that details all the costs associated with the loan. Be sure to look this estimate over carefully so you're fully aware of how much your mortgage will cost you.
When to work with a broker
If you have poor credit or finances, you may have better luck working with a mortgage broker who will shop around on your behalf to find a lender who is willing to work with your credentials.
There are a few notable perks and drawbacks to using mortgage brokers or direct lenders. The one you ultimately decide to work with will come down to your financial and credit profile and your specific needs. Take some time to compare the two before deciding who to use when applying for a mortgage.
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