Modern couple buying house with mortgage

Mortgage Lending Companies vs. Banks: Which Is Better?

So you are ready to finance your home purchase? Getting your financing right is a critical choice, and you will find plenty of places to get a mortgage.

The two most common options are large banks, such as JP Morgan Chase or Wells Fargo, and dedicated non-bank mortgage lending companies such as Quicken Loans or SoFi. Both mortgage lenders and banks are good choices, so exactly which one you go with will be a personal choice based on your needs.

To help you make the right choice, here is your guide to mortgage lenders and banks for financing a home purchase.

The Difference Between a Bank and a Mortgage lender

Both mortgage lenders and banks can help you get financed to buy your new home. Both require your credit, income, and debts to be in order.

If this is the case, you’ll want to consider the pros and cons of each to find the loan that meets your specific goals, finances, and lifestyle.

Generally speaking, as mortgage lenders specialize in mortgages, they offer a greater variety of loan options and are more lenient on credit requirements. Banks, on the other hand, offer fewer loan options and are more strict on credit requirements.

Additionally, an important difference is that mortgage lenders may sell your mortgage to another lender after closing. With a bank, you will work with the bank through the life of your loan.

So Which Is Right for You?

The bank is the first stop for many buyers. You probably already have a good relationship with your current bank, so they will be eager to secure your mortgage services as well.

Because the mortgage lending marketplace is complex and banks have a ready-made customer base, they tend to have an advantage in securing customers and consequently do not always offer the most competitive loans.

Mortgage Lenders have been grabbing an increasing share of the home loan market due to more competitive rates, flexibility, and speed in securing loans.

But this means two things. First just because banks do not offer the most competitive retail home loans does not mean they cannot be negotiated with. And second, just because you can get a cheaper loan with a mortgage lender does not mean it is the right option for you.

Why Choose a Bank

One of the best reasons to go with a bank is the comprehensive relationship you will have with them. You can manage all your finances in one location. Banks may even offer other financial services through their loan process.

This could include special savings and checking accounts, credit cards, and other products. When you pair these products, you often get better mortgage rates.

This comprehensive relationship, along with competitive mortgage terms (if you can negotiate them) can make a bank the ideal mortgage provider. Another big positive is that the bank will continue servicing your loan for the life of the loan.

The biggest issue you might face with a bank loan is that they come with much stricter lending standards. Banks are subject to federal compliance and reporting laws. If you have less-than-ideal credit, you might find it difficult to qualify for a bank loan. If you have a major financial event on your record, like a bankruptcy or foreclosure, getting a bank loan will be tough too.

Because of these regulations, banks are also slower to close on loan agreements. If you need your loan quickly, the bank simply may not be able to facilitate it.

Banks also offer less variation in their loan products. This means the right loan for you might not be available at your bank.

Finally, whilst the cross-selling of additional banking products can be a pro for savvy homebuyers, you must be careful to make sure you only agree to products you need and will use as intended. Many cross-sold products have terms and conditions in them that might mean they cost you more in the end.

Why Choose Mortgage Lending

The biggest advantage of mortgage lenders is that they are less heavily regulated than banks. This means they can offer a greater variety of loans, and often will customize loan recommendations and conditions to meet your exact financial needs and goals.

Unlike your banking manager, loan originators with mortgage companies must pass a range of courses and exams. Your mortgage broker at a lending agency is going to have a deep knowledge of the mortgage marketplace along with specific experience in matching buyers with loans.

Mortgage lenders are able to close on these loans much faster than banks. This flexibility can be vital for some buyers—especially those with credit score issues.

There are some downsides you need to be aware of. Some mortgage lenders are online-only businesses. This means you won’t have the same level of customer service you would get from a bank.

Additionally, many mortgage lenders will sell your loan to a servicing company after closing. These companies specialize in the day-to-day administration of your loan, such as receiving payments, sending statements, and managing escrow.

The problem with this is that you will not have control over who you’re working with to pay off your loan. The rates and terms will not be changed after the sale. But you will not be working with the individual who set up the loan for you.

Alternative Options

The vast majority of mortgage loans are sold by banks and mortgage lenders. But there are other options you might want to explore. There are hybrid bank and mortgage lender loans, along with credit unions, savings and loan associations, and smaller financial institutions.

You can also find loans from stock brokerages and private individuals. Some sellers are may be open to sell-financing. This is when a seller agrees to let you pay off the purchase to them over time.

Your Mortgage

Both banks and mortgage lending businesses have pros and cons. The best lender for you will depend on your circumstances and needs. The most important thing you can do is shop around and have clear goals.

Get as many quotes as you can, do your research, and negotiate, and you will find a great loan at a great rate. For more advice and guidance on the right loan for you, we have everything you need to know about loan programs here.

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