In home lending, there are generally 2 different types of entities you can get a loan from. The first is from a mortgage lender. The other is from a mortgage broker. When shopping for a mortgage, it is important to understand the strengths and weaknesses of both entities. Let’s dive right in by starting with some simple definitions.
A mortgage lender is simply any financial institution that directly lends money out to borrowers for a fee (called an interest rate). Each lender has their own terms, conditions and overhead costs that they charge the borrowers for their services. A lender will assess your entire financial situation taking into account:
- Your credit score and history (learn more about FICO here)
- Income and employment history (what if I am self-employed)
- Debts and length of debts (DTI)
- Length of credit history
- Your down payment size (why does this matter)
- Liquid assets (meaning cash money available)
Because a mortgage lender is lending their own money exclusively, they typically have a set of “box rules.” This means that if your scenario doesn’t quite fit their ideal box, they will deny your loan. This can be frustrating when time is of the essence and you have to waste it to start all over with a lender that WANTS to work with your scenario. Many people may even give up on the dream completely after a letdown from a big lender. A great alternative for borrowers that are concerned with fitting in a box or just don’t want to be placed into a box, aka, UNreduced borrowers, is to work with a mortgage broker.
A mortgage broker is an entity which may lend their own money but they also have the ability to shop around with multiple mortgage lenders. They take in your application based on the same information above and will help you apply to the lenders that will offer you the best loan terms. Most times, mortgage brokers are able to land better deals and find you better terms considering their connections with multiple lenders. If your application involves challenges, a broker can help you overcome those much easier making the loan process less stressful for you.
Whether you decide to go with a lender or a broker, you should always be aware of your own financial risk and be informed of your entire financial picture. Having a better understanding of your finances before applying anywhere gives you a higher advantage when being offered loan terms. Furthermore, when it comes to shopping for a loan to buy your dream home, you want to make sure you shop aggressively to find the best deals in town for you. You’ll want to have offers to compare in order to make the smartest financial decision for yourself. The banks are not obligated to disclose how much they are making on your loan so be sure to have a clear understanding of what has to come out of pocket up front versus what costs get added to your loan and how this affects your interest rate. To learn more about interest rates, click here. Good luck shopping!