Mortgage lenders vs. banks: Which is best for you?
Key takeaways
- Understanding the difference between mortgage lenders and banks can help you to select the lender that best suits your situation and your prospective home purchase.
- Mortgage lenders specialize in real estate financing and may have more diverse and competitive loan options, but often don’t offer other banking services/products and physical locations.
- Banks offer a wider variety of financial products and services, but their mortgage options may be more limited and carry stricter eligibility requirements.
- Mortgage brokers act as intermediaries between borrowers and lenders, and can be helpful for those with unique financial circumstances.
A lucky few can buy a home completely with cash. But most aspiring homeowners need financing to purchase property — namely, a mortgage. Many sorts of financial institutions offer mortgages, but the two biggest categories are banks and mortgage lenders, aka mortgage companies.
Each institution has pros and cons. So let’s look at mortgage lenders vs. banks, and determine which is best for you.
Mortgage lenders vs. banks: What’s the difference?
A bank is a depository institution that typically offers a variety of financial services and products, such as savings and checking accounts, credit cards and various types of loans — including mortgages. In contrast, mortgage lenders focus specifically on home loans for purchases and refinances; some also offer homeowners ways to borrow against their home’s worth, like home equity loans and home equity lines of credit (HELOCs).
Aside from the differences in teh product slate, banks often have more overhead to support physical 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 the interest rate, fees or both and might take longer to process loan applications.
On the flip side, mortgage lenders only offer, well, mortgages (or other home-related financing vehicles) — so you won’t be able to conduct all your financial business in one place. While this may be a negative for some borrowers, others may find the real-estate-specific lending place preferable.
Mortgage lenders often offer more options within the home financing field; they also tend to process applications more swiftly. In addition, their eligibility criteria may be more flexible than with larger-scale banks.
Banks |
Mortgage Lenders |
|---|---|
| Offer a variety of financial products, including mortgages | Specialize solely in mortgages/refis and sometimes, home equity loans or lines of credit |
| Can serve as a one-stop shop for your banking needs (checking, savings, IRAs, investments), but rates may be higher | Typically offer more competitive rates but are limited in scope; likely to only service your home loan |
| More likely to have brick-and-mortar offices with in-person service | Do not tend to have physical offices but may have expanded remote customer service hours |
| Tend to set more restrictive borrower qualifications | Offer more opportunities to qualify, given the greater number of loan options |
Mortgage lenders explained
Simply put, mortgage lenders are financial institutions that are focused on real estate financing. While many retail banks offer various products – auto loans, on-demand and retirement accounts, certificates of deposit, to name a few – mortgage lenders deal strictly with real estate loans.
While mortgage lenders may seem limited in scope, these institutions can provide specialized support for real estate transactions. For borrowers who require an expedient application process or a particular type of financing, these lenders may be a solid option to explore when comparison shopping for a mortgage.
Pros of mortgage lenders
- 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.”
- More lenient credit limits – Since lenders may have less-stringent criteria you may qualify to borrow more, depending on your creditworthiness and the type of property you want to purchase.
- Streamlined service – Expertise can translate to a succinct application process: Since mortgages are all they do, lenders can do them fast. Their efficiency in underwriting may mean a more expedient closing and less chance of your suffering a rise in interest rates.
- 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 of mortgage lenders
- Less human interaction – If your mortgage company is online-only, 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, and changing loan servicers is only a minor inconvenience.
- Limited services – You can’t do all your banking in one place; you’ll need another institution for checking/savings accounts, etc.
Banks explained
The International Monetary Fund (IMF) defines banks as “institutions that match up savers and borrowers [and] help ensure that economies function smoothly.” Banks serve as intermediaries between parties that loan money to the institution (earning interest in return) and parties that borrow money, paying interest in order to do so.
Some banks offer mortgage loan products, but many also connect consumers with other types of loans. In addition to lending, banks may offer savings, checking, retirement and money market accounts, insurance coverage, wealth management, currency exchange, financial investments like CDs and Treasury bonds, and other services.
If you house your checking, savings, and other accounts with a specific bank, exploring that institution’s mortgage offerings may be the best option for you. They might offer better terms to existing customers, or discounts for auto-paying between different in-house accounts.
Pros of banks
- All-in-one convenience – Having your bank accounts, savings and mortgage all with the same bank, which can make managing your finances much easier.
- Discount potential – Banks often better terms to existing customers, waiving or lowering loan origination fees or closing costs. They might offer discounts for auto-paying between different in-house accounts — like making your monthly mortgage payment out of your checking account.
Cons of banks
- 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.
- 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/financial profile isn’t a neat fit.
Mortgage lenders vs. banks: Which is right for me?
Whether it’s better to work with a bank or mortgage lender will depend 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 who don’t fit conventional mortgage underwriting standards.
On the other hand, a typical homebuyer 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 sort of institution 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.
Alternatives to mortgage lenders and banks
Banks and mortgage lenders are two major options for financing a home. purchase. However, they are not the only institutions that issue real estate loans. Others include:
- Credit unions – Credit unions function much like banks in that they serve as a waystation between those saving funds and those who need to borrow. Unlike banks, however, credit unions are run on a not-for-profit basis, and are owned by their members (their clients and customers). functionality often keeps fees and interest rates low. However, many are small operations with limited digital banking options and capacity– don’t expect a 24-hour customer service chat line or extensive on-line services.
- Savings and loan associations – A savings and loan association, also sometimes called an S&L, thrift or savings bank, specializes in real estate funding specifically. These establishments were popularized during the Depression Era to make home loans more attainable for individual consumers. Like credit unions, they tend to be smaller, local institutions, so they often offer more personal service and better terms.
- Mortgage brokers – These professionals match borrowers with loans that fit their needs. Brokers have access to expansive options when it comes to real estate loans, so they can help sort through the products available — and come up with options you couldn’t find on your own: Some lenders work exclusively through brokers (instead of marketing them directly to the public). Brokers can also help you have particular requirements, like a low down payment, or a special status (you’re a military veteran, a recent bankrupt, etc.)
Mortgage lender vs. mortgage broker
Though they sound similar, mortgage brokers are quite different from mortgage lenders. Brokers don’t originate mortgages themselves. Instead, they shop your information around to lenders in their network to find you viable options and garner offers. Although you’ll pay a fee for their services, using a mortgage broker could be worthwhile for a few reasons.
First of all, mortgage brokers function like real estate agents, helping you shop for different types of mortgages the way a Realtor helps you search for houses. They can be especially valuable if your professional or financial situation makes it more challenging to get approved with a traditional lender — anything from being self-employed to having a low credit score or high debt-to-income ratio. The broker may have lending partners in their network that specialize in borrowers who don’t fit the typical profile.
Once you settle on a mortgage, the broker then acts as your loan officer: They collect your documents and communicate directly with the lender to help get your loan application underwritten and approved. They don’t have any say in the decision, but can make sure your paperwork’s in order, advise on strengthening your application and smooth out any snags along the way.
