What's the Difference - Mortgage Broker vs. Bank
When you’re in the market for a mortgage, you have several ways to get funds, but the two most common are from a mortgage broker or a bank. Both offer loans to help you buy or refinance a home, but they work differently.
Mortgage brokers work as the ‘middle man’ between the lender and the borrower. When you work with a broker, you talk to the bank through your broker (loan officer). Banks, as you know, work directly with customers – you talk directly to the financial institution that’s underwriting and processing your loan.
So which one is better and what are the differences? Check out our guide below.
How Does a Mortgage Broker Work?
Mortgage brokers are the ‘go-between’ for you and the lender. They work on your behalf, helping you secure the right mortgage. Brokers have access to hundreds of programs from different lenders and you have access to them with one application.
If you were to do the job of a broker yourself, you’d likely complete a handful of mortgage applications and have tireless conversations with many lenders, trying to figure out which loan is right for you. A mortgage broker does this for you saving you time and aggravation. After you complete one loan application, they match you with the right lender based on your qualifications.
Mortgage broker popularity fell after the housing crisis as many were blamed for the crisis, but fortunately, its popularity is back up, with almost 15 percent of homebuyers using one today.
How do Banks and Mortgage Brokers Differ?
Banks use their own money to fund loans, so they only have a handful of programs available. If you don’t meet the bank’s guidelines, you can’t get a mortgage there because they don’t have other programs.
Brokers, on the other hand, have access to many loan programs. If one doesn’t work out, they can find you a loan at a different lender with different guidelines. Brokers don’t fund the loans themselves – the lender they send the loan through funds it – the broker just does the legwork, but brokers must follow the lender’s guidelines to get you the loans.
When you apply for a loan with a bank, they’ll push their own programs because that’s all they have. If you use a mortgage broker, they’ll match you with several loans, helping you choose the one with the best terms.
The Benefits of Mortgage Brokers
Working with mortgage brokers has many benefits:
Brokers are great for borrowers with unique circumstances. Banks often have ‘strict’ qualifying requirements that borrowers with low credit scores, small down payments, or irregular income can’t get. Brokers have a variety of programs to choose from, giving borrowers more options.
Brokers have more flexibility with interest rates because they work with a variety of lenders and can control their own profit margins.
Brokers help you through the mortgage process, working with you every step of the way until you are clear to close.
The Downsides of Using a Broker
Brokers have less control over the timeline. They must rely on the lender’s timeline and communication, which may be slower.
Brokers have no control over the closing time. They are at the mercy of the lender’s underwriting and processing turnaround time.
Brokers are sometimes more expensive than banks, especially if they found you a program for unique qualifying circumstances.
The Benefits of Banks
Working with banks also has its advantages:
Every aspect of your loan is processed in-house. You don’t have to wait for your loan officer to contact the lender; everyone works in the same building and is on the same page.
You may already have a working relationship with a bank that can provide even more personalized service since they already know you.
Banks often have some of the lowest interest rates.
The Downsides of Using a Bank
Banks don’t disclose their commission. While the commission doesn’t affect your loan, it may mean you can get a lower rate or fees elsewhere from a bank that makes a lower commission. Shopping around is the key.
Banks may have fewer products available, especially if you have unique qualifying circumstances.
Banks often have tougher qualifying requirements.
Who Gives a Better Deal – Mortgage Brokers or Banks?
This isn’t as cut and dry as it seems. Sometimes banks have the lower rates or fees and other times it’s the mortgage broker that has the lower rates.
Your rates and fees depend on your qualifying circumstances. Do you have great credit? Are you making a large down payment? Is your income steady? Any out of the ordinary ‘risky’ factors make you a higher risk, which causes both banks and brokers to charge more. This isn’t a case of one charging more than the other.
What’s Right for You?
Choosing a bank or mortgage broker is a personal decision. Ask yourself:
- Do you have less than perfect credit?
- Is your income irregular (self-employed, commission, etc.)?
- Do you have a gap in employment or other unique circumstance?
- Do you have a small down payment?
If you answered ‘yes’ to any of these questions, a mortgage broker may be the best option. Banks are for borrowers with straightforward qualifications including great credit, a decent down payment, and steady income.
No matter your qualifying factors, though, consider getting quotes from both a broker and a bank. Compare the offers including the interest rate, points, closing fees, and APRs. Don’t just focus on the interest rate as that can be deceiving. Look at the APR, as that’s a better measure of the loan’s total cost over the term, and choose the loan that’s right for you.