Mortgage lenders vs. banks: Which is best for you?
Key takeaways
- Mortgage lenders specialize in real estate financing and typically offer diverse loan choices.
- Banks offer a wider variety of financial products, but their mortgage options are often limited in comparison.
- Mortgage lenders may have less stringent requirements and lower rates, while banks are convenient and may offer discounts to existing customers.
Mortgage lenders vs. banks: What’s the difference?
Most aspiring homeowners don’t have hundreds of thousands of dollars lying around — they need financing to make the purchase. Namely, a mortgage. Banks and mortgage lenders are the two biggest options.
“Many banks are mortgage lenders, but increasingly, more mortgage lending is done by nonbank lenders,” says Andrew Dehan, a senior writer at Bankrate. “Typically, banks have physical locations, specializing in offering financial services to the communities they work in, while nonbank mortgage lenders typically only offer mortgages and only do business online.”
A bank usually 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).
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 than, say, an online lender.
This table breaks down the basic differences between the two:
| Banks | Mortgage Lenders |
|---|---|
| Offer a variety of financial products, including mortgages | Specialize solely in mortgages/refinances (and sometimes, home equity loans or lines of credit) |
| Can serve as a convenient one-stop shop for all your banking needs, but rates may be higher | Typically offer more competitive rates but are limited in scope |
| 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 | Tend to offer more opportunities to qualify |
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, a typical homebuyer who already has accounts with a particular bank might benefit from getting their mortgage there too, due to convenience or the potential for relationship discounts. On the other hand, banks are often not able or willing to qualify borrowers who don’t fit conventional mortgage underwriting standards.
“Many banks offer discounts on mortgage closing costs to their members,” says Dehan. “But you may be able to get a lower rate with a nonbank lender. As always, it pays to shop around, compare offers and consider who meets your needs best.”
Comparison-shop 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 to help you get the best mortgage rate possible.
Pros and cons of mortgage lenders
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. (Of course, this will depend on your creditworthiness and the type of property you want to purchase.)
- Streamlined service: Expertise can translate into a succinct application process — since mortgages are all lenders do, they can do them fast. Their efficiency in underwriting may mean a more expedient closing.
- 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.
- Limited services: You can’t do all your banking in one place; you’ll need another institution for checking/savings accounts, etc.
Pros and cons of banks
Pros of banks
- All-in-one convenience: Having your bank accounts, savings and mortgage all with the same bank can make managing your finances much easier.
- Discount potential: Banks often offer better terms to existing customers, waiving or lowering fees for things like loan origination or closing costs. They might also offer discounts for auto-paying between different in-house accounts, such as making your monthly mortgage payment out of your checking account.
Cons of banks
- Fewer loan options: It’s common for banks to have limited mortgage offerings compared to other lenders.
- Less flexibility: 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.
Alternatives to mortgage lenders and banks
Banks and mortgage lenders are not the only options for financing a home purchase. Others include:
- Credit unions: These function much like commercial banks, with a major difference: Credit unions are run on a not-for-profit basis and are owned by their members (ie, their clients and customers). While fees and interest rates are often low, many are small operations with limited digital banking options and capacity — don’t expect a 24-hour customer service chat line or extensive online services.
- Savings and loan associations: A savings and loan, also sometimes called an S&L, thrift or savings bank, specializes in real estate funding specifically. They 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: Mortgage brokers don’t originate mortgages themselves — they function like real estate agents, helping you shop for different types of mortgages the way an agent helps you search for houses. Although you’ll pay a fee for their services, using a mortgage broker can be especially valuable if your professional or financial situation makes it more challenging to get approved with a traditional lender.
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