Understanding the difference between a lender and a broker is an important aspect in understanding how a mortgage works. Here is a simple explanation of lenders and brokers:
What is a Mortgage Lender?
To put it simply, a lender is the source that gives the money to the debtor, it is the actual financial institution that gives you the money if you are purchasing a home. If the lender is a bank, then they receive money from their customers who make deposits into checking or savings accounts. Other types of lenders receive money from investors. Any company or institution can be called a lender if they have money to hand out to debtors, including a savings trust, stock brokerage, mortgage lender, or a credit union.
There are two main types of lenders: wholesale lenders and retail lenders. If contractors or brokers are hired, then the lender is known as a wholesale lender. If the lender processes the loans in-house and uses employees to handle everything, then they are known as a retail lender.
What is a Mortgage Broker?
A broker is an agent who works with loan borrowers to offer them the loan products that are available from multiple Lenders. The broker essentially brings together the borrowers and the lenders, so that the transaction can occur. Mortgage brokers often work on a commission basis, and they help you to secure a loan through a lending institution where they have already established a relationship. This commission is very often paid by the wholesale Lender as compensation to the broker for securing the loan.
The advantage of working with a broker is that you will receive more personalized service, because the broker can look at multiple resources to find the best option for your needs. A broker will talk with you about the type of loan that is best suited for your needs and credit worthiness, and then look at various lenders to choose one that matches your specifications. As an example, if a borrower has a great credit score, then the mortgage broker will utilize a lender that offers strong incentives for great credit score candidates. Or, if the borrower is a veteran, then the broker will help them to explore VA loan options with lenders that have quick turn times and pricing for VA home loans.
A broker is motivated to help you with the loan all the way to the end, because the mortgage broker doesn’t get paid their commission until the loan closes. An employee who works for a mortgage lender has the best interests of the lender in mind since the employee works only for the lender. Whereas a broker doesn’t work for any one particular lender so picks according to the requirements of a borrower’s unique situation.
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