Mortgage Broker, Direct Lender or Loan Officer: What’s The Difference?
If you’re shopping for a mortgage, you’ll be hit with a barrage of “We’re No. 1!” sales pitches to influence your mortgage company choice. It can be confusing to know who you should work with — a mortgage broker, direct lender or loan officer? How are they different, and why choose one over the other?
To put it simply, mortgage brokers connect you with direct lenders and loan officers work for direct lenders. Direct lenders are the only ones who actually provide funding, but finding the right lender can be tricky.
We’ll dive into the ins and outs of mortgage brokers, direct lenders and loan officers to help you make the right choices for your home loan needs.
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What is a mortgage broker?
A mortgage broker is a financial middleman that works with various lenders to match you with the best rate and loan program. Mortgage brokers don’t actually lend money.
Mortgage brokers have to follow all the federal and state mortgage lending rules, including mortgage loan origination (MLO) lending laws. In order to obtain their license, your mortgage broker had to take government-mandated classes and pass a background check and a national test. They also need to be approved by any lenders they work with.
What a mortgage broker does
A mortgage broker performs many of the same basic tasks as a mortgage lender, which include:
- Reviewing your loan application
- Issuing a loan estimate with a closing cost breakdown
- Running your credit
- Locking in your interest rate
- Collecting your financial information
- Processing your application paperwork
- Submitting your loan to the lender for final approval
- Following up on any approval conditions
- Issuing a closing disclosure with your final cost breakdown
What a mortgage broker doesn’t do
There are some functions a mortgage broker can’t perform, including:
- Approving your loan request
- Preparing and sending your loan documents for closing
- Funding your loan
- Collecting mortgage payments from you after you close
- Answering questions about changes to your mortgage payment after closing
Why you should choose a mortgage broker
It’s worth it to work with a mortgage broker if you don’t have a cookie-cutter income or credit history, need a special program for approval or want someone to shop for the best interest rate instead of doing the legwork yourself.
Because they do business with many different types of mortgage banks, mortgage brokers are familiar with niche mortgage products and can often provide solutions that a direct lender doesn’t have access to.
If your mortgage loan is denied, your broker can immediately submit your paperwork to a new lender. If one lender doesn’t offer a particular loan product, a mortgage broker can typically find one that does. They may also specialize in nonqualified (non-QM) mortgages that don’t require income documents, or mortgages that can be approved even if their client has very poor credit.
What is a direct lender?
A direct lender is a mortgage bank that makes loans directly to you. They may also be called a mortgage bank or mortgage lender. The entire mortgage process is handled by a direct lender “in-house.” There is no middleman — your loan officer deals with the loan decision maker and the source of your loan funds.
After closing, you’ll make mortgage payments to a direct lender’s loan servicing department or to a separate loan servicer that your direct lender has chosen to work with. You can contact the loan servicer directly with any questions.
What a direct lender does
A direct lender handles every aspect of the loan approval process from application to funding. Besides all of the same things a mortgage broker does, a direct lender also:
- Reviews and issues a loan decision on your application request
- Processes your final paperwork for closing
- Wires funds to the escrow company or attorney to fund your home purchase or refinance
- Handles your payments after you close
- Answers questions about your mortgage payment after closing
What a direct lender doesn’t do
There are important distinctions between a direct lender and a mortgage broker. In most cases, a direct lender cannot:
- Find another lender for you if your loan is denied
- Shop around to different lenders for a better rate
- Offer specialized non-QM loan programs
Why you should choose a direct lender
A direct lender is a good choice if you want to work directly with the decision maker for your loan. They may specialize in a specific type of loan, or be approved to offer down payment assistance programs that mortgage brokers can’t.
With a direct lender, the loan process is often very fast, since it’s all handled in-house. They may also have special approval authority for borrowers with low credit scores or high debt-to-income ratios.
This gives direct lenders an edge over mortgage brokers, who probably won’t be able to get an exception if, for example, your credit score is slightly lower than the guidelines set by the lenders they do business with.
Read more about our picks for the best mortgage lenders.
Online direct lender vs. direct lender: What’s the difference?
An online direct lender is one that conducts their business digitally from beginning to end. You may not even need a single financial document if you give the lender read-only access to your bank and IRS information.
However, not all direct lenders are online. Your local bank is a type of direct lender: They can process, approve and fund your loan on-site. You may even get a break on the rate if your mortgage payment is auto paid through a bank checking account.
Read more about our picks for the best online mortgage lenders
Comparing mortgage brokers vs. direct lenders
Use the table below for a side-by-side look at what each type of lender is best for.
| A mortgage broker is best if: | A direct lender is best if: |
|---|---|
| You want someone else to do the mortgage shopping for you | You need a fast closing without any intermediaries |
| Your income or credit history is challenging | You can get rate or closing cost discounts because you bank there |
| You want a variety of different loan options to choose from | You want to deal directly with the decision-maker |
| You’ve been denied by a direct lender | You need down payment assistance |
What is a loan officer?
A loan officer is a financial advisor employed by a mortgage broker or direct lender with one primary purpose: to provide you with the information you need to choose the right mortgage program at the best rate and lowest costs.
A loan officer has to meet federal licensing guidelines which include minimum initial and continuing education requirements. They must also pass state and federal tests of their mortgage knowledge.
What does a loan officer do?
A loan officer starts by asking you questions about your financial history and why you’re getting a mortgage. A mortgage broker loan officer checks the rates and programs from a library of approved lenders before sending you a loan estimate with an interest rate quote and a closing cost breakdown.
A loan officer employed by a direct lender will make sure you meet their minimum requirements before preparing a loan estimate. Once you choose a loan program, your loan officer will lock in your rate and hand off the loan to a mortgage processor who will handle your loan until closing.
What a loan officer doesn’t do
A loan officer can’t approve your loan or actually deliver the funds to you. Their job is to give you financial advice, properly disclose all the mortgage fees associated with the interest rate you’re quoted and guide you through the mortgage process.