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.
