Mortgage broker vs. lender: What’s the difference?

When you're looking for a mortgage, you have a choice between using a broker or going directly to a lender. Both paths can lead to the same result — signing on a loan and buying your new home. 

But brokers and lenders play separate roles in the market for home loans, and you'll want to be aware of that before deciding to work with one or the other. 

Here, we'll cover what brokers and lenders do and see what the difference is.

What does a mortgage broker do?

A mortgage broker shows you information about loans from different lenders. If you're looking for a particular type of loan — like a jumbo loan or a refinance with no upfront closing costs — a broker can track down some options for you that meet those requirements. 

A broker can also help you compare the different loans they present to you and answer your questions. 

And if you decide to apply for a mortgage offered through a broker, the broker might guide you through the application process and pass your completed application along to the lender. If the lender approves you for the loan, the broker can help you get everything in order for closing.

What does a mortgage lender do?

A mortgage lender offers loans to borrowers. The lender may show you a few different options, but they'll all come from the same source — the lender itself. 

A loan officer representing the lender can explain the features of its loans and answer questions about them. If you decide to apply directly with the lender, they'll walk you through the application process.

Once you've put together a mortgage application, either directly or through a broker, the lender reviews it in a process known as underwriting. It considers whether you meet the criteria to take out a loan — for example, if you have enough income and if you have enough cash on hand. It also estimates how much of a risk it would be to lend to you. 

If the lender decides that you qualify for a loan and it's satisfied that you're a good credit risk, it approves you for the loan. If you're working directly with the lender, it will give you instructions on getting ready for closing.

When you close on the mortgage, the lender issues you a loan and transfers the money you're borrowing to the seller.

What's the difference between a broker and a lender?

The main difference between a broker and a lender is that a broker doesn't lend money. A broker can't approve a loan application, and a broker isn't going to issue a loan. Instead, the broker is a middleman who helps you find and apply for a loan from a lender.

Also, a broker can help you shop around and might encourage you to compare loans from multiple sources. In contrast, a lender usually isn't going to show you offers from its competitors.

And another difference is that the broker's job is done when you close on a loan. A lender, on the other hand, owns your mortgage and receives the payments you make each month. The lender can choose to hold on to your mortgage or to sell your mortgage to another company.

How brokers and lenders make money

Exactly how a mortgage broker gets paid varies. A broker might charge you a fee when you close on your loan equal to 1% or 2% of the amount you're borrowing. Or, a broker might be paid a commission by the lender in exchange for bringing them your business.

A lender makes money when you pay fees or interest on your mortgage, or when it sells your mortgage to an investor.

Legal obligations

In some states, mortgage brokers have a fiduciary duty to their clients, which means they have a legal responsibility to do what's best for the borrower's finances. A broker who has a fiduciary duty can't recommend that you choose a home loan with a high interest rate instead of a comparable loan with a low rate, knowing that it's going to cost you a lot more. 

Mortgage lenders also have regulations they need to follow. For example, they have to give you accurate information about their loans, and they have to make sure there's a good chance you could repay a loan they offer you. But they generally don't have a fiduciary duty to borrowers, so they don't have to figure out if the loan they're offering you is actually the best choice for your situation. 

Is it better to work with a broker or a lender?

Going through a broker and working directly with a lender both have some points in their favor. There isn't a clear winner, but some people will prefer one over the other. 

Advantages of working with a broker

A big plus of working with a broker is that they can show you loans from many different lenders all at once. That can save you time tracking down different options. And a broker can help you compare different loans and make sense of all the details.

A broker who's knowledgeable about the mortgage market might find loans that you would have missed. And they might be able to share valuable information about lenders that you wouldn't have learned on your own. For example, they might let you know if certain lenders are more likely to approve you or are more likely to negotiate closing costs.

Advantages of working directly with a lender

Going to a lender might be the more attractive option if you already have a relationship with a lender, like if you have savings accounts and retirement accounts at a particular bank and that bank also offers mortgages. Or, if you recently took out an auto loan with a lender and had a good experience, you might want to use that same company when you buy a house. When you and the lender already know each other, you might get more personalized support.

Also, a lender can make decisions about a loan and approve your application, while a broker can't. If your finances are complex or unique in some way, it could be helpful to talk face-to-face with the lender instead of trying to explain everything through a middleman.

And if you apply for a mortgage directly with a lender, you don't have to pay a broker's fee.

When looking for a mortgage, shop around

What's more important than whether you work with a lender or a broker is that you don't settle for the first one you talk to. Contact at least a few different lenders or brokers, or a mix of both, so you can see who offers you the best rates. It's also a good idea to ask family and friends about their experiences with different lenders or brokers and to read online reviews before choosing who to work with.

There are some big differences between mortgage brokers and lenders, but it isn't always obvious which one you're dealing with, especially if they don't have words like "brokerage" in their name. And some companies take on both roles. If you're not sure whether you're talking to a broker or a lender, just ask them.