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What Is a Direct Lender in a Mortgage Process?

Getting involved in the mortgage process can be pretty stressful for most people, especially when they need to become more familiar with some of the basic terms in this industry. With that in mind, what is a direct lender in a mortgage, and what services can they provide? If you wish to go through the mortgage process as successfully as possible, consider reading this helpful article that will answer some of the most typical questions.

A house and money on the table

Direct lenders provide the general public with loans for financing their mortgages. Any financial institution or private entity can be a direct lender, and each of them will offer you a loan package with a specific rate and closing costs.

While I will discuss the benefits of working with a direct lender and some potential drawbacks, I will also compare working with lenders vs. with brokers.

A Direct Lender Is an Individual That Provides You With the Loan for a Mortgage

The mortgage industry, in general, is full of unusual terminology and a lot of professionals who are in some way a part of this complex process. If you want to have a successful mortgage loan process, you have to introduce yourself to all these individual entities and figure out how they affect you and your goal.

Since getting a mortgage is one of the biggest decisions most people make in their lifetime, being knowledgeable about this entire process is crucial. The first thing you should get yourself familiar with is a direct lender entity. Direct lenders specialize in financing mortgage loans for the public in general, most of which operate online.

The Key Takeaways of Working With a Direct Lender

A direct lender is a financial organization that provides home loans directly to borrowers without using any intermediary in the process. They don’t employ any private home equity firms, mortgage brokers, or investment banks. They also provide specialists in various disciplines, such as processing, underwriting, compliance, and closing, all in order to ensure an accurately processed loan.

How Are Lenders Compensated?

One of the things that you might be wondering is how you will pay the direct lender for their services of processing the home loan. You should keep in mind that lenders are compensated through various fees and charges. They also make money from the interest that’s earned on the principal balance, any late fees that might occur, and other expenses related to closing. The good faith estimate (GFE) each lender provides to borrowers can allow you to have a reasonable idea of how much you will pay.

A man sitting by the desk

Who Can Be a Direct Lender for the General Public?

Direct lenders are usually financial institutions or other private entities that can provide the public with loans for financing mortgages. For example, different banks and mortgage lender companies, such as

There Are a Few Things to Consider When Working With a Direct Lender

The process of applying for a mortgage through a direct lender seems quite simple, but there are many things that you can have trouble with. Most people think the application process is only about providing documentation, filling out forms, and waiting for approval. However, there are many differences you should be aware of.

Communicate Directly With Your Loan Officer

Since getting a mortgage loan can be confusing, it is important to communicate properly with your lender. You should be free to ask any questions that are bothering you or get advice on potential problems you are facing. For example, ask them whether the mortgage is personal property or perhaps how you get a mortgage deed.

When choosing a direct lender, this is why most people opt for banks and institutions they have already worked with and feel familiar with. Having a long-standing relationship with your loan officer can help secure a better loan amount and interest rate, which is crucial in such a process.

Always Have a Backup Plan With a Different Lender

Direct lenders have limited options of packages they can offer their clients. For example, one bank has several programs for a mortgage loan that they can issue you with, and they can’t offer you anything besides that.

Your main goal should be to get the optimal mortgage loan with the best interest rates, and you should not settle down for anything below that. If their first option fails, and you are not happy with the offer, go for a second or third option. Exploring different options can be time-consuming, but it also means that you might be able to score the best possible choice for your mortgage loan.

Woman signing papers for a house

Different Types of Lenders You Should Know About

To understand the meaning and role of a direct lender, it is useful to learn how these lenders cooperate and earn money compared to mortgage brokers. If you wish to inform yourself about some other types of lenders on the market, feel free to look at the table below.

Type of lenderTheir key characteristics
Portfolio Lenders●      These lenders borrow loans with their own money
●      They are not beholden to the interests and demands of other investors
●      They set their borrowing guidelines and terms you, as their collaborator, have to follow
Wholesale Lenders●      Usually, banks and institutions
●      Offer loans through third parties (mortgage brokers or other banks)
●      They usually sell their loans on the secondary market after the closing
Warehouse Lenders●      They fund their loans
●      They don’t interact with consumers
●      Usually, they use the mortgage as collateral until the client repays the loan.
Correspondent Lender●      They step into the picture once your mortgage is issued
●      Initial lender that makes and services the loan
●      Collects a fee from the loan once it closed
●      They must hold the loan or find another investor if a sponsor refuses to buy a loan
Hard Money Lenders●      Usually, private companies and individuals
●      They own significant cash reverses
●      Tend to be flexible and quick with closing loans
●      Require substantial down payments
●      They charge origination fees and interest rights which are around 10% to 20%

Know All the Pros and Cons of Direct Lenders Before Getting a Loan From Them

When getting into a mortgage process, it is essential to know all the good and bad sides of working with each lender. If you are considering getting involved with a direct lender to get your mortgage loan, you should be aware of all possible scenarios of this process.

Although direct lenders can give you reasonable rates and low closing costs, and you won’t have to worry about paying broker fees, not everything is so positive in working with them. Remember that they are not your only option and that your goal is to find the best lending program. The important thing is for your credit score not to get lowered, so only apply for a loan when you know you are well prepared.

Direct Lender vs a Broker

Basically, the choice between these two options is up to your personal preferences, so it comes down to doing research on both. While you now understand what working with a direct lender entails, mortgage brokers work a little differently and bring other benefits and drawbacks.

A broker is sort of a matchmaker – it’s the individual that will work towards shopping for the best loan for your case and work as the bridge between you and lenders. However, they do not have any money to originate mortgages but will do all the hard work, such as gathering paperwork.

Mortgage Broker Pros and Cons

Most brokers will be compensated for their work through origination fees. This figure is based on the amount of the home loan. But before you make your choice, the table below offers insight into the pros and cons of working with mortgage brokers.

They provide access to various lenders and their programsYou could end up with higher closing costs and a higher interest rate
Brokers allow you more flexibility in terms of finding the right loanThere are lenders that won’t work with mortgage brokers, so you might be missing out
They will present you with an outline of how the lenders will qualify your applicationBrokers will usually charge the home buyer with their fees and charges

Working With a Direct Lender Might Be What You’re Looking For

Both direct lenders and mortgage brokers have their advantages and disadvantages, and you are not obliged to make a definitive decision between the two right away. My advice would be to research both options thoroughly and compare their rates. That will make it easier for you to judge which route is the wisest to take in order to buy your dream home.

But keep in mind that brokers are often a better solution for first-time buyers, while seasoned buyers that have already gone through a home loan process might have better luck shopping by themselves for the right lender. It may allow you to get a better interest rate and pay less in the long run while you achieve getting the roof over your head you’ve always dreamed of.