Mortgage lenders vs. banks: Which is best for you?

TJ Porter | Bankrate.com (TNS)

Unless it’s an all-cash deal, most homebuyers turn to a mortgage to purchase property. There are many financial institutions that offer mortgages, including banks and independent organizations. Each has pros and cons.

What’s the difference between a mortgage lender and a bank?

A bank is a depository institution that typically offers various financial services, such as banking accounts, various types of loans — including mortgages — investing services and more. In contrast, mortgage lenders focus specifically on home loans for purchases and refinances, and some offer home equity products.

Aside from the differences in product slate, banks often have more overhead to support branch locations (versus a mortgage lender that operates solely online, for example) and sometimes stricter compliance requirements. This can mean that their mortgages are more expensive in terms of interest rate, fees or both and might take longer to approve.

On the flip side, mortgage lenders only offer home loans — you won’t be able to do all your financial business in one place if you work with a lender over a bank.

Mortgage lender vs. mortgage broker

Mortgage brokers shop your information around to lenders in their network to find viable options. They also handle the documentation collection for you and work directly with the lender to underwrite and approve the loan. Although you’ll pay a fee for their services, using a mortgage broker could be worthwhile for a few reasons.

Brokers are generally available to address any questions or concerns you have regarding various types of mortgages and help you navigate the application and funding process. You could also have better luck with a mortgage broker if you have a unique financial situation that makes it more challenging to get approved with a traditional lender. For example, if you have less than perfect credit or are an independent contractor, a mortgage broker may have lending partners in their network that specialize in loans for these types of borrowers.

Pros and cons of getting a mortgage with a bank

Pros

—All-in-one convenience – You can have your bank account, investments and mortgage all with the same bank, which can make managing your finances much easier.

—Discount potential – In many cases, banks offer discounts on loan origination fees or other costs to existing banking customers or those who open a checking account and have their mortgage payments automatically withdrawn.

Cons

—Less flexibility for borrowers with unique circumstances – The loan officer at your bank might not have the specialized knowledge needed for certain mortgage programs. Plus, the bank overall might have stricter underwriting standards that can make it more difficult to qualify if your application isn’t a neat fit.

—Fewer loan options – It’s not uncommon for banks to have limited mortgage offerings compared to other lenders. This could be problematic, depending on your financial situation and unique funding needs.

Pros and cons of using a mortgage company

Pros

—Experience – Because mortgage lenders focus on just one type of product, they’re more likely to have experience qualifying all kinds of borrowers in various financial situations. “The use of a specialized lender is a good idea when the homebuyer has atypical loan issues that would make approval for a mortgage loan more challenging,” says David Reischer, a real estate attorney based in New York. “For example, a person with low credit scores or self-employed income would benefit from the use of a specialized lender.” Bonus: This experience can also translate to faster closings.

—Lower costs – The best mortgage lenders might have lower rates and fees than banks, especially if the lender is an online company with lower operating costs.

Cons

—Less human interaction – If your mortgage is an online-only company, you might not be able to meet with a loan officer in person, and it could be harder to get in touch with the lender if you have questions. This can be a drawback if you’re looking for a more personalized experience.

—Potential change in loan servicers – It’s not uncommon for direct lenders to sell your loan on the secondary mortgage market shortly following closing. Your loan terms won’t be impacted, though, so a change in loan servicers is only a minor inconvenience.

How to choose a bank vs. a mortgage lender

Whether it’s better to work with a bank or mortgage lender depends on your personal situation, goals and preferences. For example, real estate investors often work with mortgage lenders for their expediency, specialized loan experience and willingness to deal with unusual circumstances. Banks often are simply not able or willing to qualify borrowers like these that don’t fit conventional mortgage underwriting standards.

On the other hand, a typical buyer who already has accounts with a bank might benefit from getting their mortgage there due to convenience or the potential for relationship discounts (also known as “incentive pricing”).

Regardless of which you choose, make sure to shop and compare offers from a combination of at least three banks and mortgage lenders. Also, consider credit unions and online lending platforms (or financial technology companies) when exploring your options. Doing so will help you get the best mortgage rate.

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