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What is the best way to shop for a loan? Go directly to the lender, or use the services of a mortgage broker? Leading Internet mortgage brokers, including Doug Galen, vice president of sales and business development with E-Loan; and Casey Fleming, principal of LoanGuide, help explain the mortgage brokerage industry to consumers.

A mortgage broker is hired by the borrower and paid by the lender at the time of closing. When you engage the services of a mortgage broker, you can expect him/her to shop the best rates in the nation for your particular needs. A broker will help you will find out how much loan for which you can qualify and what type of loan would be best for your needs.

Why go to a broker instead of directly to a lending institution? Brokers can, in many cases, save you money by providing retail loans at wholesale prices. Brokers are an unpaid sales force for lending institutions -- until they bring in a customer. They don't have to be officed, phoned, or utilitied by the lender. Because of these reduced costs, the lender provides loan packages at wholesale costs to the broker, who passes some savings on to the consumer.

"I can get you any loan cheaper than going to the lender directly," Galen declares.

How is that possible? "When we go through wholesale, all the lender has to do is fund the loan. We do everything else."

The broker works to understand your unique financial situation and goals. Every borrower is different, so there is not one lender or loan package for everyone. You may fall into most lenders' guidelines for a loan easily, or you may have special needs, such as the desire to buy a home with little or no money down. You could have less than perfect credit. When you use the services of a mortgage broker, he or she will diligently look for a loan package that will accomplish your goals at the best rate possible. Even if you are turned down for a loan by one or more lenders, the mortgage broker will continue to work on your behalf.

To begin the pre-approval process, you pay the credit report fee to the broker, who will collect this fee only once. If you apply directly to a lender and are turned down for any reason, that fee is lost, and you will have to pay a credit report fee again to the next lender. The broker will work quickly to get you pre-approved so that you may begin house-hunting immediately, or move forward on a house on which you may already have a contract. Once a home has been contracted, the broker will arrange to give you a good faith estimate, which will outline the final costs of the loan and get the home appraised. Final loan approval will depend on the inspection report and termite/wood-eating insect report, which will be arranged by you and your agent.

At closing, the broker will be paid by the lender. On your loan closing documents, you should see the exact same figures as you were presented in the good faith estimate. The brokerage fee or sales commission is called the loan origination fee, often the first line on your good faith estimate, which will give you a line by line accounting of what you will be charged for the loan. Generally, this fee is anywhere from a point (1 percent of the loan) to 3/8ths of a point. But it may not be the only fee that is collected as a profit center by the broker. If a mortgage broker originates the loan, he/she can also set the fee scale for the lender fees,which include such items as the appraisal fee, credit report, document preparation fee, tax service fee, underwriting fee, and more.

The lender fees can vary tremendously, so when you are shopping for a mortgage broker, ask for a list of fees so that you may evaluate the total costs involved in getting the loan. One mortgage broker may offer a lower loan origination fee but may make up the difference by inflating the lender fees. These costs are somewhat fixed but not subject to changes in loan rates, so there is little reason why they should vary much except as a profit center for the broker. For example, one broker may charge as much as $70 for a credit report, while another may charge as little as $15. An appraisal can run from $350 to $250. Although those figures alone are not significant, the total lender fees may vary as much as $500, a direct cost to the borrower which must be paid at closing. These fees can be negotiated; a mortgage broker would much prefer to adjust an inflated fee than lose a loan to another broker.

To understand how much you are actually being charged, look closely at the APR, which by federal law must be quoted by every lender and broker. The closer this figure matches to the actual loan, the better price your broker has given you on the total price of the loan. For example, if the loan rate is 7 percent, and the APR is 7.5 percent, you are paying half a point at closing to the broker. If the APR is 8 percent, you are paying a much higher cost for the loan and paying more cash at closing.

To learn more about mortgage brokerage and loans, visit several brokers' sites, and compare the information and services you find. Internet mortgage services such as E-Loan, LoanGuide, and QuickenMortgage are information-rich and continue to improve their range of services almost daily.

Doug Galen, vice president of sales and business development with E-Loan, says, "Our principals, Janina Pawlowski and Chris Larsen, were frustrated by the lack of consumer information in the industry. That is why they began E-Loan. Loan agents seemed more interested in closing loans than educating buyers. So we developed our Internet site with all of the educational tools. We educate and empower the borrower to make an informed decisions."

"Because we identify customers through our Web site, we are able to eliminate 70 percent to 80 percent of all costs associated with getting a loan."

Casey Fleming, president of LoanGuide, adds, "On our service, we try to explain the differences between the different types of loans and how the process works, so consumers can make the best choice for their needs." Fleming suggests that borrowers look at a variety of sites and write their questions down, going from site to site to find the answers. "After visiting a few, the loan application process will be much more understandable."