Mortgage lenders vs banks: Deciding where to get your mortgage

There’s a lot to consider when seeking a mortgage, and right up there — along with the APRs and the discount points — is the sort of lender to go with.  They fall into two basic categories: a retail bank and a mortgage lender (which can be a generic term, but we’re using here to mean a specialist in loans). Both types can be national, local or, increasingly, online.

Picking the right mortgage lender can make a big difference when it comes to everything from your interest rate to the level of customer service.  Let’s explore the merits of mortgage lenders vs. big banks.

Mortgage lender vs. bank: What’s the difference?

Although there is overlap — many banks are mortgage lenders, carrying on a robust purchase and refinance business —  these two lenders are not exactly the same.

Mortgage lenders

A mortgage lender or mortgage company is a firm that provides financing for real estate purchases. Some lenders also offer auto loans, personal loans or student loans, while others focus exclusively on property financing. Others hone in on residential-related loans — mortgages, refis, home equity loans or HELOCs.

Most mortgage lenders are independent, non-bank firms: they can be local/regional, national or, increasingly, entirely online (think Rocket Mortgage or Better Mortgage). Some mortgage companies are affiliated with a bank but go by another name. PrimeLending, for example, is a mortgage lender subsidiary of PlainsCapital Bank.

Mortgage lenders specialize in home loans, which can be good and bad. On the one hand, if it’s your first mortgage you are unlikely to have a current relationship with the institution and can’t take advantage of loyalty benefits. On the other hand, they may have more loan options available.

Banks

Retail banks, of course, are multi-varied financial institutions: They offer several services besides home financing. Their mortgage division may be within the parent organization, or it may be a wholly owned subsidiary.

Many banks are direct lenders, meaning they originate and underwrite their mortgages in-house. Some, called portfolio lenders, maintain ownership of their mortgages; but most banks eventually sell their loans on the secondary mortgage market (they keep servicing them, though, so the borrower never knows the difference).

Banks are appealing because of their name recognition, especially national ones —think Chase or Capital One — and just plain old familiarity. If you already have a long-standing checking account or savings account with a particular bank, why not patronize them for a mortgage too? You may be able to easily transfer monthly payments or get special rates or discounts.

However, they may also have more fees (or bigger fees) attached to their loans. Large banks shoulder higher costs associated with meeting federal compliance regulations and maintaining their physical offices, and may pass these on to you.

Local lenders: Pros and cons

A local lender can offer a more personalized approach, as most loan officers at local lenders live in the community where they work.

Your loan officer might have fewer clients to keep up with, too. If you have a more complicated loan, this can play in your favor, as you’ll have easier access when questions pop up.

A potential downside of working with a local lender, however, is that you might have to spend some time sorting through and vetting your options compared to simply going with your existing bank. And they may not offer as many options or discounts as national or online lenders.

Mortgage lenders vs. banks: Which is right for me?

Both options are ideal if you’re in the market for a home loan. However, deciding between a local lender vs. big banks can be challenging, so it’s important to assess your financial situation to determine which is best.

If you prefer a more personalized experience or a lender with flexible eligibility guidelines, a mortgage lender could be ideal. You’ll likely have more options to choose from and a dedicated loan officer to help you navigate the mortgage process.

By contrast, if you have a solid credit rating and an established relationship with your bank, you could qualify for special incentives if you choose this route. Banks generally have limited mortgage products compared to direct lenders, but the interest rates they offer may be lower and could save you a bundle over the life of the loan.

Again, there is no one-size-fits-all answer to this question. Be sure to weigh the benefits and drawbacks of mortgage lenders and banks to make an informed decision.

What about credit unions?

Credit unions are another option when taking out a mortgage. A credit union is a nonprofit financial institution controlled by its members and typically offers lower mortgage rates.

However, at a credit union, you might only have access to a limited line of loan products, meaning you might not find exactly what you’re looking for. Plus, you’ll need to qualify for membership. That member-focused experience, though, could lead to more case-by-case flexibility that can help you with your mortgage needs.

Are online lenders better?

An online mortgage lender allows you to move through the loan application process with an entirely (or almost entirely) digital experience. They often process applications in days and offer preapprovals within hours. They’re also worth considering if you want to take advantage of lower rates or fewer fees — their lack of overhead means lower costs, savings which they pass on to you.

Convenience, cost and speed matter, but you might also need human interaction at some point in the process. With no branch locations, this can be difficult to come by with an online lender. You may or may not have an individual loan officer assigned to you and, since they could be anywhere in the country, they may be hard to reach at times. In short, they’re not ideal if you crave a face-to-face, personal touch.

Next steps on finding the best mortgage lender

When searching for the best lender — either a national lender or local lender, a bank or a mortgage company — cost is important, but so are your needs and preferences. Some ways to narrow down your options include:

• Consider your credit. If your credit score could use improving, look into lenders who have options for low-credit score borrowers or those who don’t fit the standard financial profile.
• Compare quotes from multiple lenders. Studies show that shopping around for a mortgage could save you thousands.
• Pay attention to how lenders communicate with you. The right lender shouldn’t be difficult to work with. The best lenders are able to answer your questions promptly, be easy to reach and keep you updated throughout the process. The right lender won’t hit you with a hard pitch, either.
• Weigh the lender fees. Many lenders charge an origination fee and an application fee, to name just a few. Or they bump these charges up, to compensate for “discounts” elsewhere. Take this into account when shopping around and comparing offers.