What Is a Direct Lender?

A direct lender is the company that makes your mortgage: it decides whether to approve you, provides the money at closing, and is named on your promissory note, the signed promise to repay, as the party you owe. Banks, credit unions, and non-bank mortgage companies can all be direct lenders. A mortgage broker is not one. As the Consumer Financial Protection Bureau (CFPB) puts it, "a broker does not lend money," so a broker takes your application to a lender, and that lender approves and funds the loan.

What does a direct lender do?

Three jobs make a company your direct lender:

1. It decides whether you can repay. Under the federal ability-to-repay rule, the lender must make a reasonable, good-faith determination before closing that you can repay the loan. It has to weigh your income or assets, your job status, the new monthly payment, other debts, your debt-to-income ratio (monthly debt payments divided by gross monthly income) or the income left after debts, and your credit history. This review is called underwriting.
2. It funds the loan. A direct lender pays out the loan at closing from its own resources, which Regulation Z, the federal Truth in Lending rule, says include deposits it holds and a warehouse line of credit. A warehouse line is short-term credit, generally maturing in under a year, that banks and other lenders extend to non-bank mortgage companies so they can fund loans until the loans are sold or packaged into securities, according to the Financial Stability Oversight Council (FSOC). A company that closes a loan in its own name but uses another lender's money at closing is treated like a broker under Regulation Z's rules for loan originators, the people and companies that arrange loans, so the name on your note alone does not prove who funded the loan.
3. It holds the note at closing. Regulation Z defines the creditor as the company that regularly makes consumer loans and to which the debt is first payable on the face of the note.

Holding the note at closing does not mean keeping it. Of the home purchase loans made in the first three quarters of 2023, independent mortgage companies sold 94.9% by year-end, large banks 61.3%, small banks 58.2%, and credit unions 38.7%, according to the CFPB's analysis of Home Mortgage Disclosure Act data. The CFPB says the new owner of a sold loan must notify you within 30 days of the transfer, and that a sale does not by itself mean your servicer, the company that collects your payments, will change; what loan servicing is explains that role.

How can you tell whether a company is a direct lender?

1. Read page 3 of the Loan Estimate. The Loan Estimate is the standard form showing a loan's rate, payment, and closing costs that a lender gives you after you apply. Its "Additional Information About This Loan" section has a "Lender" line and, when a broker is arranging the loan, a "Mortgage Broker" line, each with a Nationwide Mortgage Licensing System and Registry (NMLS) ID. A filled-in Mortgage Broker line means a broker is involved, and the company on the Lender line is the creditor.
2. Ask the loan officer directly. Ask whether the company will fund the loan from its own money or credit line, whether it will be named on the note, and who makes the approval decision. The CFPB recommends asking whether a broker is involved, because some financial institutions work as both lenders and brokers.
3. Check the Servicing line on the same page. It states whether the lender intends to service the loan itself or transfer servicing to another company, which tells you whether the lender plans to stay your point of contact after closing.

When is going directly to a lender the better choice?

Go to a direct lender when you want a specific lender's loan or terms:

• A lender that plans to service your loan. If you want the company that approved your loan to collect your payments, pick one whose Servicing line says it intends to service the loan, and ask the loan officer whether the lender usually keeps servicing or sells it.
• A program limited to approved lenders. Some down payment assistance runs only through lenders an agency has approved. The California Housing Finance Agency (CalHFA), for example, offers its MyHome assistance only through CalHFA-approved lenders, and a broker must place the loan with a CalHFA-approved wholesale lender, meaning a lender that funds loans brokers bring to it. For a program like this, either apply with an approved lender or confirm which approved lender a broker will use.
• Rate-lock terms from the source. A rate lock is a lender's commitment to hold your interest rate for a set period, and the CFPB toolkit notes that lock policies vary by lender. With a direct lender, you get the lock terms, extension costs, and conditions from the company that sets them.

Going direct does not guarantee a lower price. The CFPB toolkit warns that a loan officer is not necessarily shopping on your behalf or offering the best-fit or lowest-cost loan, and the CFPB advises shopping for the best terms and lowest rates and fees whether you use a broker or a direct lender.

When is a broker the better choice, and what are its limits?

A broker is worth a call when you want offers from several lenders through one application; the CFPB says you can use a broker to find different lenders or mortgage loans. That reach comes with limits:

• The lender list is the broker's. A broker can quote only the lenders it does business with. Federal rules bar a broker from steering you into a loan because it pays the broker more, unless the loan is in your interest, and how mortgage brokers find and select loans explains the optional safe harbor, a set of steps that counts as compliance and starts with gathering options from a significant number of those lenders. Ask which lenders the broker checked for your loan.
• The lender still decides. The lender the broker picks makes the approval decision and sets the rate-lock policy, so ask the broker whose lock policy applies and who pays if the lock must be extended.
• Government-backed programs add a step. If you need a loan backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture (USDA), ask the broker which program-approved lender it would use; whether a mortgage broker can offer FHA, VA, or USDA loans covers how each program works with brokers.
• You or the lender pays the broker, never both. On a home loan for personal use, a broker you pay directly cannot also be paid by the lender for that loan. Ask how the broker is paid and how much before you apply; who pays the mortgage broker shows where the pay appears on your forms.

Get at least one quote from a direct lender and one from a broker for the same loan, then compare them line by line using the steps in how to choose the best lender for your mortgage.