One of the first steps in the home buying process is getting a loan. Many home buyers struggle with this because they don’t know where to start or are afraid that they are going to be in over their heads when it comes to securing financing. Sometimes that is because they have never gone through the process before and other times it is because they are in an unfamiliar area. Before you can make a financing decision, you need to understand who and what you are dealing with. The two major ways to get a loan are through banks/ direct lenders or through mortgage brokers.

Banks/ Direct Lenders

If you are dealing with some type of lending institution, like a bank, your contact person will probably be a loan officer. A loan officer works for that particular lending institution to help you get a loan. There will be a wide variety of loans that the loan officer can offer you, but those loans will originate from the one lender. You will fill out your loan application, and the loan officer will submit it to their particular lending institution to evaluate your qualifications and determine what is available for you. As a borrower, your money will come directly from the place that is underwriting, processing and funding your loan.

Mortgage Broker

On the other hand, mortgage brokers are basically freelance agents. They are not employed by any one company, but they function as middle men for dozens and dozens of lenders. The broker will take your loan application and submit it to many different lenders trying to find the best deal, not only for you, but also for them. The broker will be charged a certain amount by the lender, and the better the deal they find for the lender, the more they will be paid.

A common misconception about mortgage brokers is that because they are able to “shop” for your loan from so many different lenders, they are able to get you a better rate. This is not always the case since all rates are determined by what happens in the secondary market. The rates your Rolla lenders get and the rates the Los Angeles lenders get all originate from the same place. There may be slight differences, but hardly enough to dramatically affect your monthly payment.

Pros and Cons of Both

A key difference between mortgage brokers and direct lenders is the fact that with a broker, you are usually dealing with lenders from out of the area who don’t necessarily have a good grasp of the local market and how things are done. For instance, an out-of-town lender may be turned off by the fact that a home in Rolla, Missouri utilizes a lagoon for its septic system. If the lender is based out of Los Angeles, California, they probably never have to deal with lagoons, and so it instantly throws up a red flag, which can slow down the process, or even jeopardize the deal altogether. When you are using a local lender, those types of issues are a non-factor.

Control is another issue to consider. Mortgage brokers must abide by the guidelines set by the lender they represent. If that lender is out of state, oftentimes those guidelines are unreasonable for the area where you live. Local lenders may be able to ignore certain things or make exceptions on a case-by-case basis. A regional loan officer may understand the specifics of local properties whereas a distant lender can further delay a closing until the issues are resolved.

However, mortgage brokers often greatly benefit individuals with poor credit who may otherwise struggle to get certain types of loans. A brokers’ ability to communicate with so many lenders opens up possibilities that local lenders are more limited in pursuing for one reason or another.

Another issue that comes up on occasion is the issue of licensing. Most direct lenders can loan money on a property in all 50 states, but many mortgage brokers are licensed in only a few states. If you are buying a property out-of-state, that could be a large stumbling block.

Consider all these factors when trying to decide where to go to get a home loan. Make sure you weigh all these issues and figure out what best suits your needs, traditional local financing through a lender or mortgage broker. Remember that these folks are here to help you get in a home; they are not working against you.