There are many ways to get a mortgage. But let’s not forget about the two main channels: “mortgage brokers” and “banks.”
Mortgage brokers are intermediaries between banks/mortgage lender and borrowers to obtain financing for homeowners. There are also banks/lenders who work directly with homeowners to finance their retail purchases. This is known as consumer-direct loan.
Mortgage brokers are a big part of the mortgage business, accounting for more than 10 percent of all home loan originations, give or take. In fact, their share of the mortgage pie was as high as 30 percent during the mortgage boom, but fell precipitously after the mortgage crisis ensued.
But brokers still serve an essential role in the industry, and can be quite beneficial for both prospective homeowners and those looking to refinance a mortgage.
There Are Pros and Cons to Both
- Both are good options for homeowners and home buyers.
- It all depends on your loan situation and your individual needs.
- When shopping for a loan for your home, it doesn’t have to be an “either/or” discussion
- Compare them to find the best interest rate and lowest fees
Both have their pros and cons. At times, you won’t have the option of choosing between them if your credit is poor or you are in a difficult loan situation.
The majority of homeowners turn to banks or large mortgage lenders when it comes time to get a mortgage. These are the best options, as they are offered by the primary bank.
This gives opportunity for one-stop shopping as well as ongoing trust and engagement. It’s the easiest way to submit a mortgage request.
However, borrowers who have trouble qualifying for a mortgage or need to finance tricky deals will often get turned away at the big banks that don’t necessarily specialize in home mortgages. A mortgage broker is often the best choice for such people.
Brokers are good for unusual scenarios and loan programs
Brokers generally have access to far more loan products and types of loans than a large-scale bank, whether it’s FHA loans, VA loans, jumbo loans, a USDA loan, or simply a borrower with bad credit.
Bank of America may not offer conventional mortgages such as those backed Fannie Mae or Freddie Mac, but it might still be able to offer traditional mortgages.
If you go with a broker, you might wind up with a more personalized loan experience, where they can carve out solutions to your problems, whether it’s a low down payment, limited credit history, or the desire to limit closing costs and/or avoid mortgage insurance.
Although you might feel more involved with the mortgage process than using one of the large financial institutions, not everyone wants to talk to someone or see them face-to-face.
Many online lenders and mortgage companies pride themselves in being able to do things remotely via email or text. No phones required! Smartphones yes, but actually calling them no.
A Broker May Offer a More personal Experience
There might be a difference in the application process. A broker might explain the process of credit scoring, while a bank may tell you your credit score is too low.
Make recommendations such as paying off student loans or credit cards to ensure you are eligible for future credit. It is likely that a bank won’t do the extra work for you. However, a broker may find solutions to any obstacles.
Part of this is because brokers can reach out to other lending partners while banks are limited by their single loan program. They cannot shop for your loan anywhere else.
So for someone who might need a helping hand, or simply wants more attention, perhaps a first-time home buyer, a mortgage broker might be the better option.
Online consumer-direct mortgage lenders may be the best option if you are able to explain what you are doing, have an established track record of obtaining a mortgage for your home, and can afford a relatively simple loan.
Interest Rates
- Although brokers can sometimes offer lower mortgage rates than the banks, this is not always true.
- It all depends on the compensation they receive and which wholesale banks they have been approved to work with.
- To ensure that your home loan is affordable, compare wholesale and retail interest rates.
- There are many brokers and banks out there that can be very expensive, but also some that are quite affordable.
If the broker does not take too much, pricing with mortgage brokers is possible. This generally means that they don’t have to set a high compensation level, where they earn several points per loan. It would negate any advantage they might have over a bank.
Wholesale rates can actually be much cheaper than retail interest rates you’ll get with banks, meaning a lower monthly mortgage payment.
A mortgage broker was the only way to access wholesale rates.
Prior to going to a mortgage broker, most borrowers will first try to get financing from their local credit union or bank.
The most trusted and known bank is the one that borrowers trust and will offer discounts to borrowers based on an established relationship.
The bank has a lot of information about the client such as the balance in the borrower’s checking or savings account. This makes it easier to qualify and can lead to a lower rate.
There are many options available to you, including nonbank lenders that don’t offer deposit accounts or have branches. This may lead to lower mortgage rates and fees than banks and brokers.
The pros of working directly with banks:
- Use your existing relationship to get discounts (if you have a savings/checking account), – You already know the banker who will manage your mortgage
- A larger shop is more trustworthy and accountable.
- In some cases, lower interest rates
- Ability to add a mortgage to an existing bank profile and to make automatic payments from linked account
The cons of working with a bank
- Limited and conservative loan programs
- Do not disclose the yield-spread premium
- Long process, involved and bureaucratic
- May make false promises
- They make errors (some bank loan officers can be very green).
- May charge you more than necessary (commission does not need to be disclosed).
Incompetence (not being able to understand the home loan process in certain cases, if they aren’t just bankers or customer service representatives)
The pros of working with a mortgage broker
- They work on your behalf and do all the legwork.
- They can compare wholesale mortgage rates from many banks and lenders at once
- Wholesale interest rates are often lower than retail (bank branch), rates
- They work with many lenders and banks to offer more loan options.
- Because of their experience and the many lending partners they have, brokers can finance difficult deals
- These are usually easier to contact, and less bureaucratic
- You might be able close your loan quicker
The Cons of Working With A Mortgage Broker
- They make mistakes just like everyone else
- May overcharge you
- False promises to win your business
- Incompetence (lowly informed about the home loan process in certain cases if they are newbies, or simply disorganized).
- You may not be eligible for loan programs at select banks. Approval can vary greatly.
Your Experience May Be Different
- Brokers and banks can have wildly different pricing and service offerings.
- A broker is a person you can recommend highly to other people.
- You never know who you might meet if you work at a bank with many employees.
- Your experience will depend on who you are paired with as a loan officer.
Nonetheless, the experience you have can vary depending on who your work with.
While some banks and mortgage companies might overcharge you and give their opinion, a mortgage broker could do a great job and get you a better mortgage rate. Vice versa.
It all depends on your circumstances and the broker or bank you choose to work with. Make sure to research and get references.
Real estate agents are likely to refer you to their broker, bank, or loan officer. You are under no obligation to use them, though they can be helpful to quickly get through the mortgage pre-approval process.
Banks are not all good or bad mortgage brokers. One advantage to using a broker over a bank with thousands of employees is the consistency of your experience.