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Mortgage Broker vs Lender vs Bank: What’s Best For You?
When you buy a home, you have three options for where to get a mortgage:
- A mortgage broker
- A mortgage lender
- A traditional bank
Choosing the appropriate lender type will save you time and money on your mortgage and help you afford more home.
You’re also more likely to get your mortgage approved.
This article outlines the differences between a mortgage broker vs lender vs traditional bank. It explains the advantages of each lender type and how you know which type is best for your home-buying needs.
What Is a Mortgage Broker?
A mortgage broker is a person or company that shops for mortgages on your behalf, searching hundreds of companies for a fair combination of mortgage rates and fees.
Mortgage brokers don’t lend their own money. Brokers arrange for other mortgage lenders to lend you money. In exchange for this service, mortgage brokers collect a fee from the buyers, the mortgage lender, or both.
Mortgage brokers are agents. They collect mortgage applications and locate suitable sources of money. A broker may pre-approve your mortgage, but it cannot issue a final mortgage approval without the help of the lender.
Because brokers are intermediaries with thousands of lender relationships, their competitive advantage is in atypical, niche mortgage situations. Brokers do not have a natural advantage for conventional and FHA lending, although they may provide a lower price.
Home buyers who are self-employed or whose mortgages exceed conforming loan limits often find their best mortgage rates and terms with a mortgage broker.
What Is a Mortgage Lender?
A mortgage lender is a person or company with the authority to approve and fund your mortgage loan. Mortgage lenders handle all of the functions associated with starting a mortgage and getting money to your closing.
The most common type of mortgage lender is the correspondent lender. Correspondent lenders often refer to themselves as mortgage bankers.
Correspondent lenders are sometimes called mortgage banks or non-bank lenders. Their defining characteristic is a centralized office where loans are approved, and sales offices are distributed around the country. Correspondent lenders account for 68.1% of all mortgages.
Direct-to-consumer mortgage companies, including Homebuyer.com, are also grouped as correspondent lenders.
Because correspondent lenders approve and fund mortgage loans in-house, loans can close faster and with fewer mistakes than other lenders. Interest rates are often lower, too, because correspondents can operate at scale.
Correspondent lenders match well with home buyers who meet the following criteria:
- Salaried income for at least 12 months
- At least 3% available for a down payment
- A decent history of paying bills on time
- Looking for a 30-year fixed rate mortgage
The majority of first-time home buyers use financing best suited to correspondent lending.
What Is a Traditional Bank?
A traditional bank is a brick-and-mortar bank that sells mortgages and other financial products, including checking accounts, savings accounts, and credit cards. Traditional banks are sometimes known as Big Banks or traditional lenders.
Traditional banks may operate call centers through their websites or take mortgage applications in a local branch via a loan officer. Home buyer loans are reviewed, approved, and funded from a central processing location.
Traditional banks offer a narrow range of mortgage products, and interest rates are typically above industry averages. Traditional banks are a good choice for home buyers who prefer to work with a familiar bank name and who don’t mind slower processing times.
What Is the Difference Between a Broker vs Lender vs Bank?
The difference between a broker, a lender, and a bank can be summarized into three areas:
- How unique are your needs as a buyer?
- Where does the mortgage approval happen?
- Where does the mortgage money come from?
For unique mortgage loans, including no income verification loans and loans for unique properties, mortgage brokers are usually best because a mortgage broker can locate an off-the-wall or atypical mortgage loan for buyers that need it.
Brokers can locate unique loans but do not approve or fund mortgages.
For standard mortgage loans, such as a 30-year fixed-rate mortgage loan or a 15-year fixed-rate mortgage loan, correspondent lenders are usually the optimal combination of rates, fees, and speed. The majority of home buyers choose correspondent lenders.
Lenders specialize in standard mortgage loans and approve and fund mortgages.
Traditional banks work well for standard mortgage loans. While they lack speed and price compared to correspondent lenders, they make up for it in size.
|Mortgage Broker||Correspondent Lender||Traditional Bank|
|Great for unique loans||Great for standard loans||Great for standard loans|
|Don’t approve or fund mortgages||Approve and fund mortgages||Approve and fund mortgages|
|Standard rates and broker fees||Lower rates and no fees||Standard rates and no fees|
|Slower process||Quick process||Slowest process|
How Do I Find A Mortgage Broker?
A popular way to find a mortgage broker is to ask a friend for a recommendation – especially in non-typical home-buying scenarios. Mortgage brokers are state-licensed, and their geographic focus gives them local expertise. When you’re buying a non-warrantable condo or getting approved for new construction housing, it helps to work with a trusted referral.
Get at least two recommendations.
Mortgage brokers have access to different mixes of mortgages and charge home buyers differently. When you talk to two more brokers, you improve your chances of getting approved and saving money.
How Do I Find A Mortgage Lender?
For most first-time buyers, the best place to find a mortgage lender is through an online search: enter your search terms and sort through the results. You can get mortgage rates in real-time.
Treat correspondent lenders as your default mortgage company type.
Correspondent lenders typically give better terms than brokers for standard mortgage types such as the 30-year fixed-rate mortgage and low down payment loans. As you get pre-approved, your lender will tell you whether a broker might serve you better.
Correspondent lenders are multi-state companies, but some states may be off-limits. Check before you apply.
Is It Better to Work With a Mortgage Lender or Broker?
There are times when it’s better to work with a mortgage lender and when it’s better to work with a mortgage broker. Here’s how to choose which to do:
Choose a mortgage lender when your mortgage needs are straightforward. If all of the following are true, a mortgage lender may give you a better experience:
- First-time home buyer
- W-2 salaried income
- A decent credit history
- Buying an existing single-family home to live in
- Making a downpayment of 3% or more
However, if your situation is uncommon, such as you’re newly self-employed or you’re buying a condo in a brand-new building, a mortgage broker may be the better choice.
In general, simpler loans fare better with mortgage lenders.