Banks vs. Mortgage Brokers – Does It Really Make a Difference?
If you’re like a majority of Americans, chances are you’re not going to buy your home outright in cash. A mortgage is a big step on the path to home ownership, and it’s not a responsibility you should undertake lightly. You may be wondering, as you begin to entertain the notion of taking out a mortgage to buy a home, whether to go through a mortgage broker or a bank.
Does it really make a difference, and which one is right for you? To answer the first question, yes. There are substantial differences between the two that will vastly affect the borrowing process. As for the second question, you’ll need to understand those differences in order to make the best decision that works for you and your unique situation.
How are they different?
A mortgage broker acts as a middleman between the homeowner and the mortgage lender. They do what the name implies, which is broker deals between lenders and borrowers for a commission, and they’re not lenders themselves. They can, however, prepare your loan application, financial documents, and issue mortgage pre-approvals. Unlike a lender, a mortgage broker is going to have access to several different products because they work with multiple lenders.
A bank (or a direct mortgage lender) is the company that actually funds the loan. They’re the ones who approve or deny your loan one way or another, whether you work with them directly or through a broker. Your point of contact is an employee of the institution itself, often called a loan officer. Since you’re working directly with the lending company instead of a broker, you won’t be paying as much in fees as you would with a broker, but your choices are also more limited because the loan officer only offers products by the institution that employs them.
Okay, easy enough. Wouldn’t it make more sense to bypass the middleman and just deal directly with a bank?
In some cases, yes, but this isn’t a hard-and-fast rule. Like we just said, your choices are a bit more limited when you go to a lender. You’ll have no way of knowing that you’re getting the best possible interest rate unless you contact multiple lenders yourself, and that can get time-consuming. A mortgage broker can make sense when you want to be shopping around for the best deal without wasting time.
Since mortgage brokers have access to hundreds of different lenders and types of loan programs, they can shop interest rates for you. They can also help you compare different loan terms such as fixed-rate mortgage vs. adjustable-rate mortgages and 30 year and 15 year terms. Ideally, a broker can serve as an advisor to help you put together a loan that works for you. This is useful for first-time buyers in particular.
With a bank, you’ll have less room to maneuver. A lender is going to have their own requirements for underwriting loans, and they’re usually pretty rigid. A broker is able to sift through lenders that might be more likely to work with you and your circumstances. This is especially useful for buyers with lower credit scores.
In other words, dealing directly with a lender tends to work best if your credit score is good and you’re willing to do the legwork yourself when it comes to shopping around. If that’s the case, you’ve got more incentive to do this anyway. Buyers with lower credit may face more limited options, and it’s because of this that the network a broker possesses may work to their advantage.
One potential downside to working directly with a lender is the availability of your loan officer. In most cases, these lenders are large banks that service hundreds of thousands of customers at any given time, so they may not always be prompt with communication. A broker is likely to be a smaller company and you’ll probably find that they’re easier to get a hold of.
Besides the fees, are there any downsides to going through a mortgage broker?
There can be. This isn’t often talked about, but brokers not only make money by charging you fees, but they also get a commission from the lender. This can present some potential conflicts of interest, and some buyers feel that by the time they check up on whether or not the broker is truly pointing them towards the best deal for them (as opposed to the highest commission for the broker), they might as well have shopped around on their own.
Time is a factor in most real estate transactions – closing dates are usually part of an offer. A broker can sometimes take longer to process your loan since they’re not the actual lender. And in most cases, they don’t have an in-house underwriter, so they have to send your loan application to the lender’s underwriter, which can easily cause additional delays.
So which one is right for me?
As with most things in real estate, there isn’t a one-size-fits-all answer to this question. What works for one buyer may be a terrible idea for another. What you’ll need to consider is how your situation squares with the pros and cons of brokers and banks.
If you’ve got some extra time on your hands, are an experienced buyer, and have good credit, then dealing directly with a lender can save you money on fees and it’s unlikely that you’ll pay more than you otherwise would have in one case or another as long as you shop around diligently.
If you’re a first-time buyer, or if you have less-than-stellar credit, a broker may be worth the extra expense in order to A.) not waste time being denied by one lender at a time, and B.) shop around for the best rate efficiently. And think of it this way: while a broker is going to charge you fees, the extra cost may be negligible compared to saving thousands on your mortgage in the long run by getting a lower interest rate.
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