Mortgage Brokers vs. Banks
There are a variety of different ways to finance a mortgage, but I’d like to highlight two specifically, “mortgage brokers versus banks.” There are mortgage brokers, who work directly with lenders on the wholesale side to secure financing for you. And there are banks, who work directly with the homeowner to provide financing on your property.
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 these services are usually offered at the homeowner’s primary banking institution.
However, borrowers who have trouble qualifying, or want to finance tricky deals will often get turned away at banks. So for these people, using a broker is often the next best option. And pricing with brokers can be just as competitive as a bank, so long as the broker doesn’t take too much off the top. Wholesale prices are actually much cheaper than retail interest rates you’ll get with banks.
For example, I know a rep at Wells Fargo retail, which would be an 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.
That said, most borrowers will try to secure financing with their local bank before turning to a broker. Banks are the more trusted choice, and often provide borrowers with better mortgage rates based on the pre-established relationship. Because the bank already knows a good deal of information about the borrower, such as knowledge of the borrower’s checking and savings accounts, it can qualify the borrower more easily and accurately.
A broker will do so only with the borrower’s cooperation, and may decide not to verify certain information to the lender. This lack of information will lead to higher rates from lenders that work directly with the broker.
Pros of working directly with a bank:
- Building off existing relationship (discounts)
- Generally more trustworthy
- Better rates in some cases
- Ability to add mortgage to existing banking profile and make automatic payments from existing accounts
Pros of working with a mortgage broker:
- They do the legwork for you, comparing the wholesale rates of a large number of banks and lenders
- Wholesale interest rates can be lower than retail (bank) interest rates
- Brokers must disclose the yield-spread premium
- Can finance tricky deals
- Are easier to get in contact with, less bureaucratic
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
Cons of working with a mortgage broker:
- They make mistakes
- May overcharge you (how mortgage brokers make money)
- False promises
- Incompetence (poorly educated in some cases)
- May not have access to programs with select banks
That said, your experience can really vary based on who you choose, 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 interest rate for you. And vice versa. It really depends on your situation and the specific bank or broker you ultimately work with.
