Mortgage Brokers and Mortgage Lenders: What's the Difference?

By George Stargell, Senior Editor

When you're seeking a mortgage loan, you generally have two choices: Working with a lender or a mortgage broker. Common sense might suggest that contacting the loan source (i.e., the lender) directly would give you access to the best mortgage rates, but that's not necessarily true.

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

Mortgage lenders and mortgage brokers are essentially the wholesalers and retailers of the mortgage loan industry.

• Similar to wholesalers, mortgage lenders create their own mortgage products, based on their own financial resources. Lenders then offer these products to their own customers and to mortgage brokers and their customers.
• Like retailers, mortgage brokers offer a wide range of products, drawing from the various mortgage products available at local banks and other lending institutions.

Because they have more options at hand, brokers can often find more favorable mortgage terms than a single mortgage lender can. While mortgage brokers are independent contractors, some states require them to be licensed; other states don't.

Mortgage brokers typically "mark up" the overall cost of the mortgage loan to make money. While they often receive payment from the loan source, they can also charge fees to their customers, usually in the form of points or loan origination fees.

Mortgage lenders also charge points or loan origination fees, of course. In fact, points often help determine mortgage rates: Generally speaking, the more points, the lower the interest rate, and vice versa.

In the end, the main difference between a broker and a lender can come down to personal trust. More than 60 years after "It's a Wonderful Life" was released, there continue to be people of George Bailey's high moral character as well as people with Henry Potter's low scruples (a.k.a. "predatory lenders") in the mortgage lending industry.

Ask reliable friends and family members for recommendations, and research the backgrounds (and licenses, as applicable) of potential candidates. After all, buying a house is a huge decision and a huge expense, so it's vital that you work with George Bailey types, not Mr. Potter types.