When you are ready to purchase a home, you will have many questions along the way. One of the biggest decisions you will need to make is which financial institution you will obtain your loan from.
Two of the most popular ways to finance your home mortgage are through banks and mortgage lenders. While they are both great options, they each have their own sets of advantages and disadvantages that set them apart.
Before signing any paperwork or setting anything in stone, take a quick look at the differences between banks and mortgage lenders to decide which option is right for you.
The Difference Between Banks and Mortgage Lenders
Mortgage lenders and banks are both great resources when it comes to purchasing a home. While they both provide similar services with similar requirements, there are a few differences that separate the two lenders.
A mortgage Lending Company is a (non-bank) financial institution that manages home loans, giving borrowers a set amount of time to pay them back. Lending mortgage loans is the only service these companies provide.
While banks offer customers mortgage options, these financial institutions are better known for checking and savings accounts, credit cards, and other loan types.
Advantages of Using a Mortgage Lending Companies
Mortgage lenders have a little bit more flexibility when it comes to providing loans to anyone with damaged credit compared to banks. They also offer a wider selection of loan options to work with, giving borrowers an easier time choosing a loan that works best for them.
When working with a mortgage lender, you are guaranteed to have access to qualified and educated loan originators since they have to pass various classes and examinations before being hired by any company. These courses and certifications give the lenders experience and training that those working in banks might now have.
Another bonus to using a mortgage lender to secure a home loan is that these companies can work with individuals to negotiate terms rather than offering cookie-cutter loan options.
Disadvantages of Using a Mortgage Lending Companies
Although there are tons of benefits to using a mortgage lending company, there are some disadvantages to it as well.
The first issue that often comes up when talking about securing a mortgage through a lending company is how the lenders have the right to and often do, sell your loan to another service after you close.
Although the rates and terms of your loan cannot change once the sale is final, you never know who might end up with your account at any given time.
Lastly, many lending companies no longer have physical offices to visit when utilizing their services. Most of these companies are 100% virtual based, and you will have to communicate through phone calls, emails, faxes, etc.
| Advantages | Disadvantages |
| Educated and skilled professionalsA variety of loan optionsQuicker closing timeFlexible termsEasier to secure | Most companies are online only.Your loan can be sold to other companies without your approval. |
Advantages of Using a Bank
Using a bank to finance your home can be a beneficial option if you can meet the stricter qualifications required for securing a mortgage.
Most banks will offer customers discounts and other “rewards” just for banking with them. This is especially true for current customers, giving them better terms and conditions or bundling options.
You might see banks offering credit cards, specific checking and savings accounts, and other services if you choose to get a mortgage through them.
Unlike lending companies, chances are likely that your loan will never change hands, and there are typically multiple physical locations you can visit to conduct business. You also have the benefit of locking in lower interest rates with banks compared to lending companies.
Disadvantages of Using a Bank
With every pro, there is a con, and this holds true in the mortgage lending industry. While banks seem to provide excellent qualities when it comes to obtaining a home mortgage, they can also be a little difficult to obtain and maintain.
First, banks typically have much stricter standards when it comes to lending money out. This is due to the regulations and requirements set by federal compliance laws. So, unless you have spotless credit, banks might not be an option.
In addition, there are usually fewer loan options offered through banks, with longer closing time frames. This means little flexibility and longer waiting times to get into your new home.
Another downside to using banks for your mortgage needs is the fees that start to pile up because of those compliance laws. In turn, your final payout will be pricier than
| Advantages | Disadvantages |
| You will keep the same lending company throughout the life of the loan.Befits and special rates for current customers.Some might offer lower interest’s rates | Stricter requirements Fewer loan optionsLenders are not required to take courses or exams.Additional fees added for compliance laws.Longer wait time for closing |
Which is Better? Banks or Mortgage Lenders?
The better option between banks and mortgage lenders will vary depending on the specific needs of each customer.
While many people are turning to mortgage lenders due to their flexibility and quicker closing times, those who already have a great relationship with their bank and prefer to work face-to-face will still utilize mortgage options offered through banks.
Choose by Rates
Before making any final decisions, it will be in your best interest to compare quotes offered by multiple financial institutions.
Check the current mortgage rates to get an idea of where the APR should be and compare it to what is being offered.
The current rates as of February 2023, according to Consumer Affairs, are as follows.
| 30-year fixed | 6.732% APR |
| 20-year fixed | 6.363% APR |
| 15-year fixed | 5.719% APR |
Choose by Budgeting Options
If you have less than perfect credit, with negative marks on your credit report, past bankruptcies, or other credit problems, the likelihood of securing a loan through a bank is very low.
However, it is important to note that banks and lenders are not the only options when it comes to obtaining a mortgage.
You can choose to work with a mortgage broker, stock brokerages (registered investment advisers), or even private parties to obtain a home loan.
Traders can obtain mortgages under certain conditions, typically an entire year of profitable trading history and consistent, adequate income to ensure payments will be made.
Mortgage brokers don’t provide loans themselves. Instead, they find lenders to get the loan for you. While this is a great tool, it is going to cost you more than dealing with lenders yourself since these brokers take a percentage in fees.
If you have difficulty securing a mortgage through a financial institution, you might find success in purchasing a home by doing a “rent to own” contract directly with the owners.
FAQs
Are mortgage lenders or banks better for securing mortgage loans?
There isn’t a one-size-fits-all when it comes to securing a mortgage loan. Both options have their advantages depending on what you’re looking for and what your current circumstances are.
Do you need a good credit score to secure a mortgage loan?
You can obtain a mortgage loan with less-than-perfect credit. However, you are more likely to get a better interest rate with a 700 credit score or higher, with the best rates for anyone with an 800 credit score rating.
