When seeking out financing for a commercial real estate investment, many investors will hire a mortgage broker to connect them with a lender that fits their needs. However, more seasoned investors may choose to go directly to a lender, cutting out the need for a mortgage broker altogether.
What Is the Difference Between a Mortgage Broker vs Direct Lender?
“Mortgage brokers connect borrowers with lenders for financing their property,” said Ofir Shalom, a Financing Expert for Lev.
A mortgage broker helps clients find the best mortgage lender for their needs. Essentially, mortgage brokers act as intermediaries between the borrower and the lender, bringing the two together. They gather quotes from different lenders and work with borrowers to determine their financial needs.
A borrower will send the mortgage broker any important documents such as tax returns, pay stubs, proof of income, credit reports and information on any assets and investments. From there, the mortgage broker will assess the situation and calculate how much money that client can afford to borrow. Then, the mortgage broker takes all of that information to a mortgage lender that fits their needs, communicating between the borrower and the lender until a loan is approved.
Good mortgage brokers usually have a database of lenders they can contact, with information about the types of loans the lenders offer, the types of clients they take, and the types of commercial real estate they work with.
What Is a Direct Lender?
A direct lender is a bank or other private financial institution that provides a loan to the borrower. Just like with a mortgage broker, borrowers will have to provide direct mortgage lenders with all of their financial information, including tax returns, pay stubs, proof of income, credit reports and information on any assets and investments. Then, the borrower needs to fill out a loan application and wait for approval. When going to a direct lender, there is no intermediary, as in the case of a mortgage broker, so borrowers will have to research and find the lender themselves.
Many times, though, mortgage brokers and direct lenders “work together to obtain the best loan and interest rate for potential borrowers,” said Steven Ostad, Founder and Principal at Real Quick Capital. He added, “Mortgage brokers like to have relationships with as many direct lenders as possible to ensure fair funding rates and an established, mutual trust.”
- A mortgage broker acts as an intermediary between the lender and the borrower.
- A direct lender is a bank or private financial institution providing a loan.
- Mortgage brokers find the right lender for you, whereas with a direct lender, the borrower will be conducting the search for a lender themselves.
Pros and Cons of Using a Mortgage Broker
The main advantage of using a mortgage broker is having someone who can easily match you with the right lender, whether it’s for a home loan or a commercial mortgage. Without a mortgage broker, you’re left doing all of the research on your own, and as a borrower, you simply don’t have the same knowledge and resources to find the best mortgage lender for your specific needs. Having a wider pool of lenders to choose from, which is what you get with a mortgage broker, gives you as the borrower more flexibility and perhaps a better interest rate.
“If you’re growing really fast right now — or whenever there’s rapid growth — there’s no time to dedicate to securing financing for properties and closing loans,” said Shalom. “It would be more beneficial to just hire a broker to run that process for you. That frees up time for you to focus on acquisitions, existing properties, managing current tenants or any development projects or construction projects that you’re working on.”
Additionally, if anything in your application isn’t up to par — like a poor credit score, for example — you’ll have a much harder time finding a lender willing to work with you. A mortgage broker, however, will work to find you a lender and negotiate a deal that works for your circumstances.
Essentially, a mortgage broker provides some peace of mind, as borrowers won’t have to meet with multiple lenders and negotiate a rate on their own. And this also prevents a hit on your credit score when multiple lenders have to conduct a credit inquiry. With a mortgage broker, you’ll only have one inquiry on file.
When working with a mortgage broker, the lines of communication between you and the lender aren’t exactly open. Since the mortgage broker acts as the intermediary, there’s a less streamlined process of communication than if you were to go to a direct lender. And if you’re well-versed in the loan space, then there may not be any need for a mortgage broker.
“For an individual with existing knowledge of the loan space, the use of a mortgage broker may be redundant,” said Ostad. “The ability to establish a relationship with your lender directly can enable a more personalized approach to your loan package and allow for the borrower to have a greater say in the rates they’re receiving.”
In addition, a mortgage broker always charges a broker’s fee on top of closing costs, so that’s one disadvantage to consider. Although you won’t have to research lenders, you will have to research mortgage brokers to make sure you’re getting a fair deal and that they have a track record of connecting buyers with good lenders. Finally, it’s important to note that some lenders won’t work with brokers, so that eliminates a certain pool of lenders from your options.
Pros and Cons of Approaching a Direct Lender
For many property buyers, going to a direct lender instead of a mortgage broker could be a better option. For starters, it can be easier to communicate directly with the lender, as opposed to having to go through an intermediary. You also won’t be paying broker fees with a direct lender, or wondering whether the broker’s commission affected who they connected you with. Some lenders also offer deals if you go to them directly, without a broker.
“It is best for a client to have a relationship with a direct lender, as their fees will not get padded, and they are able to cut out the middle man,” said Ostad.
On the other hand, going directly to a mortgage lender means fewer options for you as the borrower. Without a mortgage broker, you’re left to choose between a handful of lenders that you find in your own research, whereas a mortgage broker has an entire database to choose from.
Trying and failing with multiple lenders also means more credit inquiries, which will affect your credit score, and as mentioned above, hiring a mortgage broker can prevent this, as you’ll only have to go to one lender. A broker will know based on your documents whether or not you’ll be approved for a loan, so there’s less uncertainty.
“We’re in the markets all day,” said Shalom. “We understand how lenders are executing and placing deals. We know who’s doing what. We know where they’re coming in at. We know how they’re modifying — versus when you’re not really in the market, you don’t know how lenders are pricing. It’s more beneficial to have a broker who understands the markets very well and knows who’s doing what, if there are any new lenders that have emerged, if there are new products that the lenders are offering.”
Ostad added, “For the novice borrower, exploring a direct lender’s proposal without the use of a mortgage broker may not yield the most successful results.”
When to Use a Mortgage Broker vs Direct Lender
There are, of course, specific scenarios where it’s better to go to a mortgage broker over a direct lender.
When Your Business Is Growing Rapidly
One situation in which to use a mortgage broker, said Shalom, is when your business is quickly growing, and you simply don’t have the time to research lenders and find the right one for your needs. In this scenario, it’s “more worth it to outsource,” said Shalom. Hiring a broker will take the responsibility of finding a lender off of you, freeing up time to focus on your business.
When You’re Not Familiar With the Lending Space
“Another reason why you would use a broker is that you are buying a property in a place where you’re not familiar with who the best lenders are,” said Shalom.
If you’re new to the area, or generally new to commercial real estate lending, seeking out a mortgage broker is a good idea. For new investors, it can be quite difficult and time-consuming to find a lender on your own, and oftentimes, you won’t get the best deals.
If a deal is particularly complex, a mortgage broker will come in handy, said Shalom. It can be difficult to find a lender that fits the complexities of your deal, but a mortgage broker will be able to do so quickly.
Mortgage Broker vs. Direct Lender
Depending on your needs, a mortgage broker could be the best option for finding a direct lender, especially if you don’t want to go through a big bank or credit union. If you already have a relationship with certain lenders or are an expert in the lending space, then a mortgage broker may not be necessary. But for new investors or investors who want help finding the right lender, a mortgage broker is the way to go.