In this article
- Types Of Mortgage Lenders
- The mortgage industry usually has two main options or loan originators:
- Mortgage Brokers vs. Banks
- How Direct Lenders Work
- Pros of Mortgage Banks
- Drawbacks Of Working With Mortgage Banks
- How Mortgage Brokers Work
- Advantages of Working With Mortgage Brokers
- Mortgage Brokers Also Have Their Drawbacks:
- What Are The Current Mortgage Rates?
As you shop around for a mortgage, you mainly have two options – a bank or a mortgage broker. Depending on your financial situation, one might be better than the other. A person with a high credit score will make a different choice compared to an individual with a lower score. The key here is to shop for rates from both sources and compare them in terms of turn times for appraisal, underwriting, and the loan processing timeline. The difference may surprise you.
Types Of Mortgage Lenders
For first-time homeowners or home buyers looking to finance, the main goal is probably to find the best rates and the lowest fees on your new loan. To get the best deal, you need to shop around with a few different lenders and compare the same product and terms. You also need to choose the kind of mortgage company you want to work with.
The mortgage industry usually has two main options or loan originators:
Direct lenders (mortgage companies and big banks): These institutions process, originate, and finance the mortgage themselves. The lender handling your loan is the same company that lends you the money. Some of the big lenders include credit unions, big banks, and mortgage companies specializing in home loans.
Mortgage brokers: these are middlemen that help customers match with the best mortgage lender for their unique needs. brokers usually work with multiple wholesale mortgage companies and act as a single point person to help compare multiple loan options.
Will it matter whether you work with a bank or a mortgage broker? Well, it might, based on your specific needs. For instance, you might be able to save a lot of money and time working with a bank if your loan file is straightforward. However, banks usually don’t have to disclose what they are making on your loan, and you might end up paying more than you should if you skip shopping around and comparing offers.
If your mortgage application ran into some challenges, such as a poor credit score or a low down-payment, a broker might help get a loan product with a better rate. not that you are not only restricted to working with banks or mortgage brokers only. you can apply with as many different types of lenders as you’d like.
To get the best of both worlds, try obtaining loan quotes from at least one broker and one bank to find out who has the better deal when shopping for a mortgage.
Mortgage Brokers vs. Banks
Generally speaking, if your loan is a simple straightforward transaction, and your income, credit history, and assets are strong, you might be able to save money and time working with a bank. This is especially true for conventional conforming deals. Banks typically only have jumbo options, and their rates will vary from lender to lender, considerably more than the conforming rates. If your mortgage application has a lot of challenges, a broker can help as they probably know which lenders are most flexible.
For example, a broker might be best for you if you have a FICO score of 580 and have a sparse credit report, as you will be right on the Borderline of qualifying for an FHA loan. a good mortgage broker will be aware of which lenders are typically lenient on credit scores and those that are more likely to approve your application.
With this in mind, many brokers on the market today offer competitive rates in line with that of direct lenders. Many banks today also have a variety of loan programs. If you are looking for something a little more creative, consider looking for portfolio lenders. These are lenders and Banks that service their loans in-house, instead of selling them to investors on the secondary market.
Specialized lenders that only handle home loans, such as Better Mortgage and Rocket Mortgage, are generally categorized the same as banks. Just like banks, they are direct lenders. However, they typically don’t offer other financial services such as savings, checking accounts, or credit cards. These types of lenders usually only handle refinance and home purchase loans. Some might also offer Other financial services like home equity lines of credit or equity loans.
While not always, Mortgage lenders are less conservative compared to banks. As such, they might be more flexible about outside-the-box kinds of applicants, such as those with bigger loan amounts or lower credit scores.
For example, a mortgage lender like New American Funding will allow credit scores as low as 580 for FHA loans, while big banks like Wells Fargo will require a minimum score of 600. Caliber home loans, another specialized mortgage company, will do jumbo loans with as low as a 5% down payment. you will be hard-pressed to find a bank willing to go that low.
When it comes to interest rates, there’s no overarching rule for both banks and mortgage lenders. The rate you get will have to do more with your qualifications, including down payment, credit score, and loan amount, than the specific lender. Therefore, it’s important to shop around with a few different companies to find out which can offer you the best deal.
How Direct Lenders Work
Direct lenders, including banks, credit unions, and online lenders usually use their own money to fund mortgages, which can help streamline the mortgage process. Their loan officers, underwriters, and processors all work for the same company.
This means that you can access the main source if you are looking for a loan from a direct lender. For example, if you want a mortgage from a company like Rocket Mortgage, you can go directly to them and fill out a loan application. Loan officers (LO’s), essentially serve as the sales force of the lender. They and their commission when they originate mortgage loans, and the prices they charge might not be negotiable.
On the other hand, the cost associated with rates might be negotiable as the commissions for the LO’s could be reduced to help you with the pricing. Additionally, bank loan officers can only offer loan programs in their portfolios, meaning that the options available to you will be limited.
If a direct lender is not approved to zero down USDA mortgages, then the loan officers won’t be allowed to offer you one. They might not even mention USDA loans as an option, even if you qualify. Banks will still be flexible with their mortgage pricing.
Loan officers might be able to offer you the same mortgages at different price points, from no-closing-cost loans that have a higher rate to high-upfront-cost loans with discount points and reduced interest rates. When shopping for direct lenders, it will be up to you to ask about their pricing options and negotiate the rate and fee structure you are looking for.
Pros of Mortgage Banks
The following are some of the advantages of working with a mortgage bank or a direct lender:
You get the chance to influence the application process – you might even be able to negotiate some costs like origination fees and underwriting costs.
In case working with a banker or a brick-and-mortar institution you already know is important for you, working with a local bank might give you the best experience.
Drawbacks Of Working With Mortgage Banks
The following are some of the drawbacks of working with a bank instead of a broker:
Banks, unlike brokers, usually don’t have to disclose what they make on your loan. As such, you might end up paying more than you need to if you don’t do proper research.
A conservative bank might not approve your mortgage even if you’d make a good candidate for other lenders.
How Mortgage Brokers Work
Mortgage brokers typically work with different lenders, giving them access to lots of products available at different price points. This means that you can go from one broker to another and compare their loan programs. The broker will help you understand the closing costs, interest rates, and other details of each offer to find the best one for you. to compare loan programs from different lenders you need to apply with each one separately and evaluate them on your own.
This is not as intimidating as it might sound. All lenders usually use a standard Loan Estimate Model when detailing their offers, making mortgage options easy to compare side-by-side. Both brokers and banks offer “rebate pricing” to help lower closing costs when refinancing or buying a home. This rebate is referred to as Yield Spread Premium, and it involves accepting a higher interest rate in exchange for lower upfront costs. The broker will pay a commission for loans with lower rates, usually about 1% of the loan amount.
Since mortgage brokers are often smaller than banks, working with a broker means that you will likely have more human-to-human contact while working through your loan application. Your realtor or real estate agent can also give you referrals for reputable brokers in your area if you do decide to take this route.
Advantages of Working With Mortgage Brokers
Mortgage brokers operate differently than mortgage bankers. The following are their upsides:
- Brokers typically have access to more loan programs and interest rates from different lenders. they might therefore be able to provide a more personalized product to suit your needs.
- Brokers can set their profit margins and are therefore easier to negotiate with.
Mortgage Brokers Also Have Their Drawbacks:
Brokers generally have less control over their underwriting processes as they work for the lender. This means that if the wholesale underwriter places your file on the back burner, your broker might be unable to do anything about it.
Broker fees are generally more expensive. This might be because they tend to have access to more complex loans, and complexity tends to raise the lender fees.
Brokered loans will also take a bit more time to close. This might be a concern if you have a tight deadline for refinancing or buying a home.
What Are The Current Mortgage Rates?
Today, mortgage rates from banks and mortgage brokers are highly competitive. However, no matter the loan originator you choose, be sure to obtain pre-approval early in the home buying process. pre-approval will help you understand the amount of home loan you can afford and what your ideal monthly mortgage payments should be. In addition, if you want to get the best deal on a home loan, get at least 3 or 4 quotes.
Don’t forget that in the end, it won’t matter what type of lender you choose, provided you got the best deal available. You can only do this by shopping around and comparing.