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.
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
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 are actually 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 wholesale. 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 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.