Buying a House: Use a Lender or a Mortgage Broker?
Q. I’m getting ready to buy a home next year and I know I should start by consulting someone about financing options. My co-worker says she worked with a mortgage broker when she bought her home. What’s the difference between a mortgage broker and a lender?
A. I’m impressed that you’re taking this important first step to becoming a homeowner—educating yourself about your financial options.
Here’s the major difference between brokers and lenders:
- A mortgage broker is someone who works with a variety of lenders to find a loan that fits your needs.
- A lender works for a financial institution that offers mortgage loans specific to that bank, credit union or mortgage company.
A broker works as an intermediary for you. They’ll gather your pertinent financial information and shop around with different lenders to compare mortgage rates. They’ll then determine which lenders are likely to approve you for a loan at the best terms.
Working with a broker may slow down your application process, because the broker has to shop around. However, if you don’t think you can qualify for a loan or have a specific challenge (limited job history, a low credit score, etc.), a broker can pair you with the right lender to approve a loan.
A lender has access to specific loan programs but typically doesn’t offer as wide a variety of loans as a broker. But if you plan on applying for a fixed-rate, 30-year home loan, then you don’t necessarily need the help of a broker.
Do some research on your own and make contact with someone at a financial institution such as a bank or credit union. Many of these institutions have special programs you may be eligible for, including a low down payment loan.
In your search for the right loan and the right lender, it’s important to check for references and to find someone who will function as a consultant to advise you on the best loan to meet your needs. It’s a smart idea to interview several types of lenders, and there are several things you should do to prepare yourself before you meet with a mortgage lender or broker.
Check your own credit report (all three credit reports from Experian, Equifax and TransUnion are available for free once per year from www.annualreport.com) and look for errors or negative information. Of couse, a lender or broker will also examine your credit and can offer advice on ways to improve your credit score. Keep in mind it’s best to do a credit check as early as possible, because negative information or mistakes on your report can take months to correct.
In addition to checking your credit, gather the information that a broker or lender will need to see—including bank statements, two years of tax returns, two recent pay stubs and any other evidence of income.
Take the time to create a budget and think about how much you’d be comfortable paying for your housing each month. Your comfort level is an important guideline to how much you should borrow, because it’s possible you’ll qualify for a larger loan than you’d want to repay.