Before you apply for a mortgage, you should determine which type of lender you should use – a mortgage broker or a bank.
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Both entities offer the same thing – mortgage loans. It’s their offerings, interest rates, and closing costs that may differ. So how do you know which one is right for you?
Using the Bank For Your Mortgage Loan
When you use a bank for your mortgage loan, everything you do goes through the bank from start to finish. The loan officer that originates your loan works for the bank, as do the underwriters, and closers. The bank uses its own money to fund the loan too.
The bank may have limited programs available for you, as they can only use the programs they have in-house. If you don’t fit the requirements for any of these loans, you won’t be able to get your mortgage with the bank. The loan officer can determine the interest rate and closing costs based on the bank’s requirements. They don’t have to rely on any outside sources because everything is handled from the bank. There aren’t outside investors that will buy the loan.
Using a Mortgage Broker for Your Mortgage Loan
Mortgage brokers are ‘agents’ for the actual lenders. The lenders are wholesale lenders. They don’t deal with the general public. Instead, they farm the loans out to various loan officers within mortgage broker offices.
Several lenders send the broker their rate sheets and underwriting guidelines. The broker then originates loans and determines where they fit in with a lender. The broker makes the commission from the wholesale lender. The amount they make depends on the commission the lender is offering for a specific rate. If the wholesale lender isn’t offering commission on a specific rate, the mortgage broker may then charge you points, known as origination or discount points.
When Should You Use a Bank?
Since banks have stricter rules and fewer programs, they are best suited for borrowers with good credit and low debt ratios. Banks work well when you already have a relationship with the bank too. For example, the bank you have your checking and savings accounts at already know you. They have an idea of your financial habits and are able to determine if you are a good risk just from those accounts.
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If you have any type of odd circumstances, need to ‘bend’ the rules a little bit, or have to use compensating factors to qualify for a loan, a bank probably wouldn’t be the best option for you. Banks are good when you have 20% to put down on the home and have straightforward loan needs.
When Should You Use a Mortgage Broker?
Mortgage brokers often have many more loans at their disposal. If there’s anything ‘strange’ about your qualifications, you may do best with a broker. The loan officer can shop around for a loan for you, trying different banks until they find a home for your loan.
Since brokers are in control of their commissions, they can control how much you pay for the loan. If you are a low-risk borrower and your loan doesn’t require a lot of work, you may find that a broker will charge you fewer fees. If your loan is a lot of work or you are a high-risk borrower, it may cost you more.
Keep in mind, though, brokers aren’t in control of the underwriting process. They have to rely on the wholesale lender that’s funding the loan. The broker doesn’t keep any loans on its own books – everything is funded outside of the broker. This does give the broker a little less control, which can make the process slightly complicated.
It’s a good idea to shop around with both banks and mortgage brokers when you look for a loan. Pay close attention to the fees, interest rates, and requirements. Banks may have stricter requirements but lower fees and brokers may have looser requirements but higher fees. It’s up to you to find the one that fits your needs financially as well as that will approve your loan based on your situation.
