A lucky few can purchase a home with just cash. But most people who want to buy a home need financing to buy a property — a mortgage. Many different types of financial institutions offer mortgages, but the two biggest categories are banks and mortgage lenders, or mortgage companies.
Each institution has its pros and cons, so compare mortgage lenders and banks to determine which is best for you.
Mortgage Lenders vs Banks: What’s the Difference?
Banks are depository institutions that typically offer a variety of financial services and products, such as savings and checking accounts, credit cards, and many types of loans, including mortgages. In contrast, mortgage lenders specialize in mortgages for purchases and refinances. Some lenders also offer homeowners other ways to borrow against the value of their homes, such as home equity lines of credit (HELOCs).
Aside from product differences, banks often incur higher expenses maintaining physical branches (compared to, for example, mortgage lenders that operate exclusively online) and may have stricter compliance requirements, which means bank mortgages can be more expensive in terms of interest rates, fees, or both, and they can take longer to process your loan application.
On the other hand, mortgage lenders only offer mortgages (or other home-related financing vehicles), so they can’t handle all of their financial operations in one place. While this may be a disadvantage for some borrowers, others may prefer a lender that specializes in real estate.
Mortgage lenders often offer more choice in the mortgage space and tend to process applications quicker. Plus, their eligibility criteria may be more flexible than larger banks.
bank | Mortgage Lenders |
|---|---|
| Offering a variety of financial products, including mortgages | Specializes in mortgage/refinance only, and occasionally home equity loans and lines of credit |
| It offers a one-stop service for all your banking needs (checking, savings, IRA, investments), but interest rates may be higher. | They usually offer more competitive interest rates, but may have a limited range and only offer mortgage servicing. |
| More likely to have a brick-and-mortar store with in-person service | They tend not to have a physical office, but may have extended remote customer service hours |
| Tends to set stricter borrower qualifications | More loan options available, increasing your chances of qualifying |
Mortgage Lender Description
Simply put, a mortgage lender is a financial institution that focuses on real estate lending. While many retail banks offer a variety of products such as auto loans, on-demand accounts, retirement accounts, and fixed term deposits, mortgage lenders only handle real estate loans.
While mortgage lenders may seem limited in scope, these institutions can offer specialized assistance with real estate transactions. For borrowers who need a fast application process or a specific type of loan, these lenders may be solid options to consider when comparing mortgage options.
Mortgage Lender Benefits
- experience – Because mortgage lenders focus on only one type of product, they are more likely to have experience screening all kinds of borrowers in different financial situations. “Working with a specialty lender is a good idea if a homebuyer has atypical loan issues that could make it difficult to get approved for a mortgage,” says New York-based real estate attorney David Reischer. “For example, someone with a low credit score or self-employed income would benefit from working with a specialty lender.”
- More generous credit limits – Lenders may have less strict standards, so you may be allowed to borrow more depending on your credit score and the type of property you want to buy.
- Streamlined Services – Expertise translates into a streamlined application process. Because lenders only handle mortgages, they can close the loan quickly. Lender efficiency means your loan will close faster and you’ll be less likely to be hit by rising interest rates.
- Cost reduction – The best mortgage lenders are likely to have lower interest rates and fees than banks, especially if the lender is an online company with lower operating costs.
Cons of Mortgage Lenders
- There is little human interaction – If a mortgage company is online-only, you may not be able to meet with a loan officer in person, which can make it 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.
- Possible change of loan servicer – It is not uncommon for direct lenders to sell loans in the secondary mortgage market shortly after closing. However, the terms of your loan are not affected and changing loan servicing providers is not an inconvenience.
- Exclusive Services – You can’t do all your banking in one place. You’ll need separate financial institutions for things like checking and savings accounts.
Bank Description
The International Monetary Fund (IMF) defines a bank as “an institution that connects savers and borrowers and ensures the smooth functioning of the economy.” Banks act as intermediaries between those who lend money to financial institutions (earning interest in return) and those who borrow money (paying interest in return).
Some banks offer mortgage products, but many also offer other types of loans to consumers. In addition to lending, banks may offer savings, checking, retirement and money market accounts, insurance, asset management, currency exchange, financial investments such as CDs and Treasury bonds, and other services.
If you have a checking, savings or other account with a particular bank, it may be best to look into their mortgage products, as they may offer better terms for existing customers or discounts for automatic payments between accounts at different banks.
Benefits of Banking
- All-in-one convenience – Having your bank accounts, savings and mortgage all with the same bank makes managing your finances much easier.
- Potential discounts – Banks often offer better terms to existing customers, such as waiving or lowering origination fees and closing costs. They might also offer discounts for automatic payments between different company accounts, such as making your monthly mortgage payment from your checking account.
Banking shortcomings
- Lack of loan options – It’s not uncommon for banks to limit their mortgage offerings compared to other lenders, which could be a problem depending on your financial situation and unique financing needs.
- Less flexibility for borrowers with special circumstances – Bank loan officers may not have the expertise required for your particular mortgage program. Additionally, banks may have stricter lending criteria across the board, making it difficult to get financing if your application or financial situation isn’t up to par.
Mortgage lenders vs banks: which one is right for me?
Whether it’s better to work with a bank or a mortgage lender depends on your personal situation, goals, and preferences. For example, real estate investors often work with mortgage lenders because of their agility, specialized lending experience, and willingness to deal with unusual situations. Banks are often simply unable or unwilling to qualify these borrowers who don’t fit traditional mortgage underwriting standards.
On the other hand, a typical home buyer who already has an account with a bank may benefit from taking out a mortgage with that bank due to the convenience and potential relationship discounts (also known as “incentive pricing”).
Whatever financial institution you choose, make sure you compare offers from at least three banks and mortgage lenders. Also, consider credit unions and online lending platforms (or financial technology companies) as you consider your options. This will help you get the best mortgage rate possible.
Alternatives to mortgage lenders and banks
Banks and mortgage lenders are the two main options for financing a home purchase. However, they are not the only institutions that issue real estate loans. Others include:
- Credit union – Credit unions are similar to banks in that they act as a waypoint between people with savings and people who need to borrow. Unlike banks, however, credit unions operate on a not-for-profit basis and are owned by their members (clients and customers). Because of their high functionality, they often have lower fees and interest rates. However, many are small operations with limited digital banking options and capacity, so don’t expect 24-hour customer service chat lines or extensive online services.
- Savings and loan association – Savings and loan associations, also known as S&Ls, savings banks, or thrift banks, specialize in real estate lending. These organizations became popular during the Great Depression to make mortgages more accessible to individual consumers. Like credit unions, they are often smaller, more community-based organizations and therefore often offer more personal service and better terms.
- Mortgage Broker – These professionals match borrowers with loans that fit their needs. When it comes to real estate loans, brokers have access to a wide range of options, so they can sift through available products and suggest options you might not find on your own. Some lenders only do business through brokers (rather than marketing directly to the general public). Brokers can also help you meet certain requirements, such as a low down payment or special status (veterans, recent bankruptcies, etc.).
Mortgage Lenders and Mortgage Brokers
Although the names sound similar, mortgage brokers are quite different from mortgage lenders. Brokers don’t originate mortgages themselves. Instead, the broker passes on your information to lenders in their network to find viable options and gather offers. Although there is a service fee, using a mortgage broker can be worth it for a few reasons.
First, mortgage brokers act like real estate agents, helping you find different types of mortgages, just as a real estate agent helps you find a house. They are especially helpful if your occupation or economic situation makes it difficult to obtain a loan from a traditional lending institution. From being self-employed to having a low credit score, a high debt-to-income ratio, and many other reasons. A broker’s network may have lending partners that specialize in borrowers who don’t fit the typical profile.
Once you have a mortgage in place, a broker acts as your loan officer. The broker gathers your documents, communicates directly with lenders, and helps underwrite and approve your loan application. While the broker doesn’t make decisions, they can help make sure your paperwork is in order, offer advice to strengthen your application, and smooth over any issues that may arise along the way.
