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Direct Lender And Commercial Mortgage Broker Differences.
Copyright (c) 2007-2012 Kirkham Burbidge
Navigating the seemingly dangerous waters of lending can be tricky. But let's face facts, you need money for a building and don't have it. The good news is: money is more available now than ever before and in today's market the rates are better than ever. With lower rates and greater flexibility in terms and loan packages there is literally something to fill almost any financial need. However, the bad news is: loan profits act like blood in shark infested waters drawing out unscrupulous lending techniques and schemes get as much money out of the process as possible.
"Knowledge is power."
Sir Francis Bacon, Religious Meditations, Of
Heresies, 1597 English author, courtier, and philosopher
(1561 - 1626)
There are a few things that ought to be learned as a protection for those needing to swim into the waters of lending. Two terms have been bantered around which deserve definition. Those about to get a loan, either commercial or home loan, need to know before jumping in just which fish they are dealing with.
Essentially, there are two ways to get the money that you need:
Method #1: EARN IT. This is the absolute best way for financial solvency. Make the money before you spend the money. It is one piece of advice that if followed would create wealth untold. However, because the world around us is so fraught with expense and the simple facts exists that to make money in business you much spend it, there must be a solution to involves borrowing it from a credible source.
Method #2: BORROW IT. In the spirit of good advice remember that if your lending source has no office, lends from a roll of bills secured by a rubber band, has a middle name like "Fingers" or "The Knife", is not licensed, and has terms that involve the your kneecaps and a pipe as penalty for late payment, DO NOT borrow from him. These individuals are called loan Sharks and you must stay away. However, there are legitimate ways of funding a loan and can happen via two sources. There are advantages and disadvantages to each and it is important to be informed which would fit the circumstances of the loan being processed. These two sources are direct lender and mortgage broker.
Direct Lender:
Funding for a loan is made directly by the institution that has the money. There is not a "middle man". Working directly with a lender gives the client express access to what that particular company offers. Lenders usually have a selection of loan programs that meet the needs of their targeted clientele. For instance, some lenders are more comfortable with commercial building loans and can offer a bridge loan, or a type of short term loan that will fund certain aspects of the building process until the project is completed and the final mortgage can be arranged.
There are many different companies to lend money and offer just as many specialized programs. Because of the many differences it is important to interview several different lenders to determine the proper fit for each situation. Companies seeking commercial funding should do their homework and define exactly what their needs are in a loan before interviewing lenders.
Usually direct lenders employ two types of representatives to work with clientele: a branch representative who is salaried and a loan representative who is paid on commission. Both types can be quite effective in closing a loan with the possibility of the latter being more keenly motivated to offers special services to keep the client happy.
Advantages
Lower fees. In most circumstances lender have a self imposed cap on fees and will not breach it.
More lender control. Because they own the money, the direct lender can facilitate faster processing of a loan.
Better service and access to special programs or rates. Almost all lenders have special offers and programs that they do not allow brokers to give.
Better, more direct communication. Customers deal directly with the lender or source of funding and can negotiate terms with those that make the final decision and not someone in between.
The loan underwriting happens at a smoother pace. Dealing with the lender directly means that this higher level of flexibility in underwriting can exist.
Disadvantages
It is unlikely that any given lender will always have the lowest rate. Those seeking funding directly will need to shop lenders for the best rate.
Lenders do not always offer a large number of loan programs to fit every need. Lenders are more like to specialize in types of loans, commercial or residential.
Direct lenders traditionally do not offer the same level of service. The client must know what they need before beginning the process.
When seeking funding directly, more self education and research is necessary to make better decisions.
Mortgage Broker:
A broker is a guide or "middleman" who acts as an intermediary between the client and the funding source.
Mortgage brokers or loan brokers as they are often called, are separate from the financial institution that actually owns and lends the money. Brokers do not determine eligibility of a loan application; they simply fill it out correctly and submit it. A broker determines the right mortgage program once the client is qualified. They generally act as a guide or a "hand holder" throughout the loan process.
Brokers get paid well for what they do. Their earnings come in the form of a commission, paid by the lender, which is determined by the amount borrowed on the loan. This is typically between half a percent up to four or five percent of the loan amount. In virtually all cases this fee is passed on to the borrower as an origination fee or higher interest rate.
Brokers act as the marketing body for lenders and are accommodated because the lender always would like more loan business. Because of this increased desire to gain business the lender is willing to pay a fee to get it. Also, brokers often save a lender time because of the initial preparation work involved in any loan package.
Advantages of a Broker:
Document preparation is almost always handled by the broker with less effort from the client. The client simply provides all the pertinent bank and personal information.
Because of their training and education a broker can help the client understand the different types of mortgages available and help them choose one that fits their needs.
Brokers act as intermediaries between the client and the lender to resolve possible problems before the client even sees them.
Brokers often analyze the client's financial profile and therefore can provide counsel to the client on how to proceed properly.
Disadvantages of a Broker:
Fees are much higher when working with a broker, often as high as five percent of the loan amount.
Brokers are often contractually bound to a certain selection of lenders. This limits their choice and range of programs as well.
There is a risk when using brokers that they are unskilled or dishonest and can take advantage of an uninformed client by misrepresenting rates or adding hidden fees to the bottom line of the loan.
Often brokers are more apt to gain funding from sources that treat them well with timely commission payments etc. and not those that offer superior rates.
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