Banks or Mortgage Brokers?
As a real estate investor, a big part of any investment plan you have is going to be how it should be financed. Like lunches, there is no such thing as “free” real estate. Real estate is a commodity that must be paid for. As a real estate investor, one of the most important roles you will play is to put together your deals using a variety of different financing tools.
In this piece, we’re going to focus on two such sources of capital. Hard money lenders are always an option, but really, if you’re an experienced investor, you shouldn’t really be looking to go down that road unless you’ve got a solid short-term plan for a fix-and-flip (and a good exit strategy, too).
The purpose of this article is to outline the differences between two more common sources of capital. They can actually be categorized as either direct or indirect lenders, and that’s how we’re going to approach them. More commonly, they’re just referred to banks/lenders, or as mortgage brokers.
So which is best, and why?
Banks and direct lenders.
Banks, mortgage banks and nonbank lenders all are direct lenders, meaning they review your application and make the decision to lend you their money. Typically, the institution will sell your loan on the secondary market.
The main benefit here is reliability. You probably know and trust the institution, and it is regulated by state and federal agencies. Chances are, if it’s a local lender, it has strong ties with your community. You’re also not going to have to deal with any middlemen, because you’re engaging directly with the source of your loan.
You can also potentially save a good bit of money here too. Some fees are non-existent when you’re dealing with the loan originator. A direct lender also may process your loan faster than other providers.
The one downside here is that you’re not going to see a whole lot of variety because lenders offer only their own programs. To comparison shop, you will need to speak with several lenders, which can take a lot of time.
Mortgage brokers
A mortgage broker is a middleman who may represent the mortgage loan products of many lenders. The broker’s goal is to match you with the loan product that best meets your needs at the best price. Once your loan is approved, you will usually need to deal directly with the loan originator or their mortgage service provider.
The most noticeable benefit in this case is the exact opposite of what dealing with just one lenders affords: variety. By shopping across a range of different programs and lenders, a mortgage broker may find you a better fit than a direct lender could. A mortgage broker can also expertly steer you to the national or regional lenders that are most likely to accept your application based on your financial and personal information.
You may get a more favorable loan rate, just by virtue of sifting through a large volume of loan programs, but that’s not a guarantee (especially with the fees attached by most brokers) so we don’t suggest assuming this as a reason to go with a broker; you should have other reasons as well that fit with your business plan or investment model.
In addition to variety, a good broker can also offer a quick search process and point you to lenders that prioritize speed. That’s not a guarantee, but it’s definitely a possibility.
The main downside here is that some mortgage brokers attempt to increase their profit by writing hidden costs into your loan. Your best defense against that is to know the loan process and ask questions. Some of these servicing fees can be worth the benefits that brokers offer (after all, they can’t be expected to do their job for free), but you also want to make sure they’re not throwing in hidden fees for absurd reasons.
The final word.
Whether a broker or direct lender, or any form of investment for that matter, works better for you is going to depend entirely on your specific plan. You could, as we suggested earlier, possibly obtain the best of both worlds by sifting through lenders and loan programs yourself, just like a broker would, and find a good source of capital. If you have the time and know-how, then we say go for it. If you’re not sure of what you’re doing, or if your time is limited, then it’s probably best to go with one of the two options we’ve detailed here and stick with it.
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– Get It Right Solutions LLC