Mortgage Brokers vs. Banks

There are a variety of different ways to finance a mortgage, but I’d like to focus on two specific channels, “mortgage brokers versus banks.”

There are mortgage brokers, who work as middlemen between banks/mortgage lenders and borrowers on the wholesale end to secure financing for homeowners. And there are banks and lenders that work directly with homeowners to provide financing on the retail level.

Mortgage brokers are a big part of the mortgage business, accounting for more than 10 percent of all home loan originations.

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 a valuable role in the industry, and can be quite beneficial for both prospective homeowners and those looking to refinance.

Pros and Cons to Both

There are pros and cons to both, and sometimes you will have little choice between the two if you have poor credit or a tricky loan scenario.

The majority of homeowners turn to banks when it comes time to get a mortgage. They are the most obvious choice, mainly because home loan services are usually offered at the customer’s primary banking institution.

However, borrowers who have trouble qualifying or need to finance tricky deals will often get turned away at banks. So for these people, using a mortgage broker is often the next best option.

Of course, pricing with mortgage brokers can be just as competitive as a bank, so long as the broker doesn’t take too much off the top. Wholesale rates can actually be much cheaper than retail interest rates you’ll get with banks.

For example, I know a mortgage consultant who works at a Wells Fargo retail bank branch (example of using a bank directly), and her rates are much higher than Wells Fargo’s wholesale division.  And the only way you can access their wholesale rates is through a mortgage broker.

Of course, most borrowers will attempt to secure financing with their local bank or credit union before turning to a mortgage broker. Banks are seemingly the more trusted and familiar choice, and often provide borrowers with discounts based on a pre-established relationship.

Because the bank already knows a good deal of information about the client, such as the balance of the borrower’s checking and savings accounts, qualifying can be easier and may result in a lower rate.

A broker will only be able to verify such information with the borrower’s cooperation, and may choose not to provide certain information to the lender. This lack of information (stated income loan) could lead to a higher interest rate.

Pros of working directly with a bank:

- Build off existing relationship (discounts if you have a checking/saving account)
- You already know the banker who will handle your mortgage
- Perhaps more trustworthy, more accountable than a smaller shop
- Lower interest rates in some cases
- Ability to add mortgage to existing banking profile and make automatic payments from linked accounts

Cons of working with a bank:

- Conservative loan programs
- Do not disclose the yield-spread premium
- Lengthy process, very bureaucratic
- False promises
- They make mistakes
- May overcharge you (commission doesn’t need to be disclosed)
- Incompetence (poorly educated about the home loan process in some cases if they’re just general bankers or customer service types)

Pros of working with a mortgage broker:

- They do all the legwork for you, working on your behalf with the lender
- They compare wholesale mortgage rates from a large number of banks and lenders all at once
- Wholesale interest rates can be lower than retail (bank branch) interest rates
- You get more loan options because they work with numerous banks and lenders
- Brokers can finance tricky deals because of their knowledge and various lending partners
- Are typically easier to get in contact with, less bureaucratic

Cons of working with a mortgage broker:

- They make mistakes like anyone else
- May overcharge you (how mortgage brokers make money)
- False promises to get your business
- Incompetence (poorly educated about the home loan process in some cases if newbies)
- May not have access to programs with select banks (approval varies considerably)

That said, your experience can really vary based on who you choose to work with, as some banks and lenders may overcharge you and give you the run-around, while a mortgage broker may do an excellent job and secure a lower mortgage rate for you. And vice versa. It really depends on your situation and the specific bank or broker you ultimately work with, so be sure to shop around and ask for references.

Not all mortgage brokers are good or bad, and the same is true with banks. However, one benefit of using a broker is that the experience is probably a lot more consistent because it’s just one person (and their team), as opposed to a large bank with thousands of employees.

Many mortgage brokers are mom-and-pop shops, so it’s easy to get someone on the phone or speak in person.

Most of them provide personal service, meaning you’ll have a direct phone number to reach them, and can even visit them in their office if you have questions. You might not find the same level of service at the big banks…

So if you want someone to guide you through the loan process, a mortgage broker may be a good choice for you. They also tend to hustle a bit more with their commission on the line.

To sum it up, mortgage brokers can be a good option if you’re shopping for a loan, but you should always compare their rates and service to those at your local bank and credit union, just to be sure.

Read more: How to get the best mortgage rate.


15 Comments

  1. H April 19, 2013 at 1:06 pm -

    Is it possible to refinance out of a wholesale mortgage?

  2. Colin Robertson April 20, 2013 at 11:42 am -

    Yes. It doesn’t matter if the mortgage comes from a mortgage broker (wholesale) or via a retail bank. That won’t affect your ability to refinance the loan. And if you originally used a broker, you can refinance with a retail bank. Or vice versa. So shop around!

  3. Ike June 26, 2013 at 10:19 pm -

    I tried both the bank and broker route, and found that the broker I wound up working with was more personable, helpful, and he got me a lower rate. Just my two cents, I’m sure the experience can vary.

  4. Carl July 9, 2013 at 5:13 am -

    Thanks for showing the positive side of working with a broker. Yes, there are still good reasons to choose a broker over a bank, despite the former being public enemy #1 after the mortgage bust.

  5. Leroy July 30, 2013 at 5:10 pm -

    I prefer the personal attention and reliability of working with a broker. I can call mine up night and day. The banks don’t care about customers these days. They’ll promise everything upfront, and then are nowhere to be found when it comes time to get the deal done. The downside is that brokers are sometimes the pricier option.

  6. Darryl August 15, 2013 at 10:53 am -

    I’ve been using the same broker for years. He always has access to the best loan programs, and keeps abreast of the latest industry regulations so I don’t have to worry about getting approved for my mortgage, regardless of the underwriting changes that take place. And his pricing is always competitive. Why deal with a bank when you have your own concierge service?

  7. Eddie August 21, 2013 at 11:51 pm -

    Do brokers still exist? I heard their market share fell to another all-time low. Soon a retail bank will be your one and only choice for a mortgage.

  8. Lincoln September 9, 2013 at 4:33 pm -

    I used a broker up until my last refinance when I found better pricing at the retail level. Still loved his knowledge and ability to shop on my behalf, but a lower rate is a lower rate…

  9. Emilio September 16, 2013 at 2:40 pm -

    Try getting a banker to call you back when you need to lock your rate, or guide you through a difficult approval. Most of them rely on a computer to tell them what to do.

  10. Nico November 15, 2013 at 7:29 pm -

    I lost my job a few months back and as a result I became delinquent on my current FHA mtg (3mos) and 1 month behind on my car note. This lowered my score from 700s to low 600s. I got a really good job offer and start next month. I want to buy a home in my neighborhood that is a really good deal. seller will not do seller financing. Can I still get a mortgage?

  11. Colin Robertson November 17, 2013 at 8:06 pm -

    Nico,

    Speak with a broker or two to see if they work with any lenders that can help you. It’s generally pretty difficult to get a mortgage with recent mortgage delinquencies and gaps in employment, but take the time to look around to see if anyone can make it happen.

  12. GL February 26, 2014 at 10:54 am -

    My home is financed by a seller through his IRA plan. I am behind on my payments due to loss of job and about to go in foreclosure. I have contacted many mortgage companies, securing help, but since home is financed through sellers IRA, no one can assist me. Can you give me some insight. time is running out. Presently, I am in a temporary position and salary is low-scale.

  13. Colin Robertson February 26, 2014 at 3:43 pm -

    GL,

    What have the banks or brokers you contacted said was the issue specifically? And have you tried working with the seller directly?

  14. Gilda March 17, 2014 at 10:14 am -

    I am just finishing construction of a new (second) home, and am shopping around for rates now. Does moving from a construction loan to a permanent loan necessarily make mine a complicated loan procedure? Is there any reason I should not look at mortgage brokers in this instance? And I would be looking at a “refinance” — right? not a new purchase loan? My construction lender does offer perm loans, but I feel like I can do better elsewhere. I welcome your advice.

  15. Colin Robertson March 17, 2014 at 1:11 pm -

    Gilda,

    Any loan can be complicated if don’t prepare for any potential red flags and address them accordingly beforehand. And a construction loan can certainly add more potential issues. It should be designated as a refinance if you were the owner of record of the land before securing the construction financing.

    A broker could actually be a good option in your case because they tend to know the guidelines best and can shop your rate with multiple lenders all at once to find the best pricing. But it’s generally recommended to try all routes (broker/bank/credit union) at once to ensure all options are exhausted. Simply accepting the construction lender’s rate wouldn’t give you the full picture of what else is out there.

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