Mortgage lender vs. bank

Types of mortgage lenders

There are two types of mortgage companies: brokers and direct lenders. Mortgage brokers are essentially liaisons who work with potential homebuyers to find the best lender for their particular situation.

If you’re an atypical borrower (e.g., you’re self-employed or have unstable credit), on a tight schedule or budget or have lots of questions regarding the mortgage process, a broker might be right for you. Brokers often charge hefty brokerage fees, though, and they may push you toward specific lenders they have deals with.

Direct lenders, on the other hand, directly fund and originate mortgages. Direct lenders usually offer several types of home loan programs with specific requirements you must meet to qualify. Banks are direct mortgage lenders.

How a bank mortgage works

A bank mortgage is a home loan you borrow directly from a bank or financial institution. Often, banks have just a few home loan options with specific eligibility requirements for each type. A bank may have more strict credit requirements and less flexibility when working with borrowers in atypical situations than a lender that only offers mortgages.

Bank mortgage pros and cons

If you choose to procure your home loan through a bank, you could qualify for leverage or perks for bundling services like checking or savings accounts. This could mean access to low or no account fees or low-interest credit cards as well as more favorable mortgage terms.

Bank loans, however, often have strict standards for lending. So, if your credit isn’t great (if you’ve suffered a bankruptcy or foreclosure, for example), you might not be eligible for a bank loan.

Because loans usually aren’t a bank’s primary focus, it can also take longer to process a bank loan than one from a mortgage company.

Mortgage lender pros and cons

Direct mortgage lending mortgage companies offer several home loan programs for a variety of borrowers. Their credit requirements are often more lenient because they're focused on working with a wide variety of borrowers. Mortgage companies are also more specialized in their services than banking institutions, which means they typically process loans faster.

In today’s growing tech economy, there’s now an abundance of lenders available exclusively online. This is a bonus for those who want to take care of business from the comfort of their own home, but many people still want to sign with a pen and paper and shake hands in real life when making these big decisions. Fortunately, there are plenty of both options available.

Bank mortgage vs. mortgage lender rates

When you’re comparing your lending options, make sure to do your research and get a few quotes.

Your rates might be better if you can go with a bank you already have accounts with.

Remember that if you choose to go with a broker instead of a direct lender, the broker will take a commission, which could be significant. The broker’s fee is a portion of the loan, so the higher your mortgage, the higher your fee. The upside to choosing a broker is that they often make it easier to get multiple offers and shop around for lower rates.

If you work with a bank or another direct lender, there’s no need to pay a broker. Your rates also might be better if you go with a bank you already have accounts with. The downside is that it’s harder to comparison shop when dealing with direct lenders individually.

Mortgage points are also important to consider. These are fees you pay a lender for a lower interest rate. This is often referred to as “buying down your rate.” In general, each mortgage point costs 1% of the original mortgage amount. So, if your home loan is for $500,000 and you’re offered a 3% interest rate, you could get it down to 2% by paying an extra $5,000 upfront. This can save you a great deal of money in the long run.

How to choose a mortgage lender

No matter which type of lender you choose, make sure you feel good about offering the institution your business. If a company has good reviews, a solid track record and high ratings, it’s more likely you'll have a good experience with it. Make sure to do your research, read all the reviews you can and talk to real people you know who can share their experiences.

Ultimately, you want a lender that’s transparent, offers reasonable rates and doesn’t have a history of poor service or reviews.

Bottom line: Should I work with a bank or a mortgage company?

There’s no one-size-fits-all option when choosing between a bank and a mortgage company — each has its own benefits and drawbacks. If you already have accounts with a reputable bank that offers borrower perks, you probably can find a better deal there than with another lender. If you want a company that specializes in home loans and can process mortgages quickly, though, a mortgage company might be the choice for you.

No matter which type you choose, your home loan lender should make you feel comfortable, respected and confident.