Mortgage Broker vs. Lender - Here’s What to Know

Both mortgage broker and mortgage lender help with the ultimate goal of homeownership.

What Is the Difference Between a Mortgage Broker and a Mortgage Lender?

The most significant difference between the two is that a mortgage broker works to help those seeking mortgages find the best lenders.

The lender is a bank or other financial institution that decides if you qualify for a loan and eventually can hand over the cash for your home.

Key Differences:

Mortgage Brokers are independent entities that help potential homebuyers find the best place to lend them money.
Mortgage Lenders are banks or other financial institutions that lend money to those looking to purchase a residence.
Mortgage Brokers get paid a percentage by either the lender or the borrower.
Mortgage Lenders get paid a percentage through the interest of the loan and various fees outlined in the loan estimate.

What Is a Mortgage Broker?

A mortgage broker helps someone seeking a mortgage find the best options for a mortgage lender.

After meeting with their client, the broker will connect with lenders in their network to see who is willing to loan money.

Often, a broker is wise to use because they develop relationships with different financial institutions willing to lend money to those seeking a mortgage.

Mortgage brokers tend to not only know the best deals, but they know which lenders are the most accommodating.

This knowledge is essential in the loan application process because closing a loan can be difficult if a specific bank has complex underwriting methods.

Also, if you don't have the best credit, you can save time and money by using a mortgage broker.

How to Find a Mortgage Broker

A quick Google search of "Mortgage Broker, Your City" is a great starting point.

Realtors are excellent resources for finding a broker. A realtor in the business for several years has experience working alongside brokers and can recommend which ones are best to work with.

You can also reach out to your community for a reliable broker. Ask your neighbors, Facebook friends, or even a money mentor to give you real-life advice.

How Do Mortgage Brokers Make Money?

One of the most confusing parts of mortgage brokers is how they make money. Since they are primarily a connector, it can seem like a bad deal for them, but this isn't the case in reality.

Mortgage brokers make money by charging a fee for their service, typically around 1-2% of the loan amount.

It's important to understand that either the lender or the borrower can pay for this fee, which means the bill might be yours.

When the borrower pays the broker fee directly, you'll see this line item in your closing costs. Again, it can be around 1-2% of your loan amount.

If the lender pays the broker, then the fee can be rolled into your monthly payment. In other words, the lender can pay the broker upfront, and you pay this fee back to your lender in the form of a higher monthly payment.

Most brokers will negotiate an upfront fee in exchange for their services. Still, it's important to ask prospective brokers how much the cost is and who is responsible for it.

Mortgage Broker Pros and Cons

One-stop-shop for finding a mortgage – The broker does the work for you, searching for a lender that can offer you a loan for a good rate.
Helpful for borrowers with imperfect credit – If you don’t have excellent credit, finding a lender can be difficult. A broker knows which lenders are the easiest to work with in these situations.

Fees – You may have to pay the broker 1-2% of your loan amount out of pocket. If the lender pays this fee directly to the broker, the lender can also build the cost into your loan
You may find a better deal on your own – If you have excellent credit, you may have an easier time getting approved for a mortgage from your bank or other financial institution and can save the cost of paying for a broker.

What Is a Mortgage Lender?

A mortgage lender is a bank or financial institution that lends a borrower the money for a mortgage, including a credit union or an online mortgage company like Rocket Mortgage.

Mortgage lenders look for borrowers with the best credit and debt-to-income ratio and compete with other lenders to offer the best mortgage rate.

If you want to know if the mortgage rate a lender is offering is good, check out the Freddie Mac site to see the average rates in the U.S.

If you have excellent credit, the rate a lender offers you should be at or below the average national rate.

Borrowers with excellent credit can also save some money by doing some leg work to find a lender instead of using a broker.

You can save yourself from paying a broker's fee, and since you have excellent credit, you'll also have an easier time finding a bank that can lend you the money for your mortgage.

If you're shopping for a lender on your own, instead of using a broker to find a lender, you'll want to compare the mortgage rate each offers and the fees each one will charge.

How to Find a Mortgage Lender

Since lenders are financial institutions, a mortgage lender can be a local or national bank or a credit union.

There are plenty of ways to find a great mortgage lender. If you already have a solid relationship with your bank, that’s an excellent place to start.

But, note, this is also where mortgage brokers shine--finding the right lender to help you achieve the dream of homeownership.

Check out our full article on How to Find the Best Mortgage Lender.

How Do Mortgage Lenders Make Money?

Mortgage lenders make money from the interest paid during the loan.

During the preapproval process, the mortgage lender will include the interest rate and how much the buyer is estimated to pay in interest.

A 30-year interest rate loan can average around 3.99% but can range anywhere between 1% and 7%, so make sure you pay attention when signing those papers.

But that's just the beginning.

When you receive your mortgage estimate from the lender, locate and tally all the fees. Some fees may include:

Application fees
Origination fees
Underwriting fees
PMI (Private mortgage insurance, learn more about this topic here)

Lenders can also make money by offering you the option to purchase points in return for reducing your interest rate. You pay the lender a fee, and they lower your interest rate a bit. You can learn more about how this works in this article.

Finally, did you know it’s common practice for a lender to sell your mortgage? If this happens to your mortgage, there’s no need to panic. Many times, the change doesn’t affect the borrower.

You may even continue to make your mortgage payments to the original lender as that lender can also charge the new owners of your mortgage for managing the loan--another way for the original lenders to make money. You can read more about how this works in this article.

Mortgage Lender Pros and Cons

Save on broker fees – Approaching a lender directly instead of using a broker can save you from paying a broker fee.
May be easier to work with – If you already established a solid relationship with your bank or another financial institution, you may experience better service throughout the home-buying process. They’ll want to work to keep your business.

Getting approved may take some time – If you don’t have excellent credit, you may have to approach several financial institutions to find one that will loan you the money.
You might find a better mortgage rate through a broker – Again, if you don’t have excellent credit, you’ll have to shop around to find a lender that can offer you a decent mortgage rate. In this case, it may be easier to use a broker.

Bottom Line - Should You Choose A Mortgage Broker or Should You Choose a Mortgage Lender?

Consider your needs and where you are in the home-buying process to know whether you need a mortgage broker or a mortgage lender.

If you are beginning to explore purchasing a home, it is wise to contact a mortgage broker to help you find the best lender for your situation.

Not only will a mortgage broker be able to help you find a lender with the best loan options for you, but their connections will help match you to a lender with the best application process as well.

You might choose to go directly to a mortgage lender if you have good credit, a solid financial history, or an excellent relationship with a bank or credit union.

Lastly, keep in mind, that researching each lender takes time. If you can’t or don’t want to spend the time to research lenders, a mortgage broker is likely best for you.

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