The difference between mortgage lenders and banks
Mortgage lenders and banks both provide financing for the purchase of your next home, but they differ in their primary focus and the products and services they offer.
Banks focus on the big financial picture, offering products such as checking and savings accounts, credit cards and various other loan products. Mortgage lenders, on the other hand, focus specifically on providing mortgage loans only. They don’t offer the same breadth of financial products and services as banks.
Mortgage lenders and banks differ in numerous other ways, as well:
- Different rates: Banks tend to offer more competitive interest rates and fees but may charge more fees since they have higher overhead costs.
- Flexibility: Banks cater to a much larger audience, while mortgage lenders often provide more personalized and specialized services, especially for borrowers with unique financial situations. They might be more willing to work with borrowers who don't meet the stringent requirements of traditional banks.
- Customer service: Mortgage lenders often prioritize personalized customer service. Banks, on the other hand, have a more generalized approach due to their broader range of financial services.
- Loan processing time: Mortgage lenders can, in certain circ*mstances, expedite the loan processing timeline, often offering quicker approval and funding compared to traditional banks.
Bank mortgage pros and cons
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.
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. Plus, 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.
Pros
- Account perks are common
- May have lower interest rates
- May offer proprietary loan programs
Cons
- Fewer loan options
- Strict credit requirements
- Can take longer to process
» COMPARE: Best banks
Mortgage lender pros and cons
Direct mortgage lending 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.
There’s also now an abundance of mortgage 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 options available.
Pros
- Variety of programs to fit many needs
- Lenient credit requirements
- Specialization
Cons
- May not have an in-person location
- May have high interest rates
- Fewer opportunities for bundled account perks
» COMPARE: Best mortgage lenders
Types of mortgage lenders
Although mortgage lender is an umbrella term, underneath that umbrella is a wide variety of lender types, each designed to serve different types of borrowers.
When searching for mortgage lenders, you’ll run into the following options.
Retail banks
These are traditional banks that offer a wide range of financial services, one of which includes mortgage loans. They often have strict eligibility requirements but may provide competitive rates for borrowers with strong financial profiles and high credit scores.
Credit unions
These are community-owned financial institutions that offer mortgage loans to their members, often at competitive rates. Since these are community-focused banks, there’s a strong customer-centric approach.
» MORE: Credit union vs. bank mortgage: how to choose
Mortgage bankers / direct lenders
These specialized lenders focus only on mortgage lending, providing many loan options to borrowers. They often have in-house underwriting and funding processes, leading to quicker loan approval and closing times.
They operate both online and through brick-and-mortar locations, but online-only options tend to offer a streamlined application process and competitive rates because the rest of the company’s overhead is low.
Mortgage brokers
A mortgage broker is a middleman to you and your lender financing your purchase. Its job is to help you identify which loan is right for you and then work with you to find a lender that meets your criteria. Since mortgage brokers aren’t typically tied to a single financial institution, they have your best interest at heart.
Wholesale lenders
These lenders work with mortgage brokers to offer loans to borrowers. They don’t interact directly with the public but instead provide funding to mortgage brokers who then work with borrowers to find a mortgage that suits their needs.
Correspondent lenders
These lenders fund loans with their own capital but sell them shortly after closing to investors or larger financial institutions. They often work with a variety of underwriters and may offer a diverse range of mortgage products to cater to different borrower needs.
How to choose a mortgage lender
No matter which type of lender you choose, you need to make sure you feel good about its offerings and features. Make sure to do your research, read all the reviews you can and talk to real people you know who can share their experiences.
In addition, think through the following features.
- Interest rates and fees: Compare the interest rates and fees offered by different lenders. Look for competitive rates and consider the overall cost of the loan, including origination fees, points and closing costs. Each lender has a different approach, so it pays to look around.
- Customer service: Evaluate the quality of customer service provided by the lender. You want a lender that offers clear communication, is responsive to inquiries and provides personalized assistance throughout the (long) mortgage process.
- Product offered: Consider the range of mortgage products available from the lender. Do they offer both fixed-rate and adjustable-rate mortgages? What about government-backed loans? A financial institution with many options helps you more easily find a product that best suits your financial situation and goals.
- Closing costs: Understand the various closing fees associated with the mortgage, including agent costs, appraisal fees and any other charges. Compare these costs among different lenders to ensure you choose one with reasonable fees.
- Reputation: Research the lender's reputation and read customer reviews to gauge the experiences of past borrowers.
- Loan turnaround time: Assess the lender's average loan processing and approval time. Many lenders these days can provide a reasonable and efficient turnaround time.
- Qualifications for the loan: Understand the lender's qualification criteria and requirements. Compare these requirements with your financial situation so you know if you can get approved for the right mortgage.
» MORE: How to apply for a mortgage
FAQ
Is a mortgage broker the same as a lender?
No, a mortgage broker is not the same as a lender. A lender directly provides the funds for a mortgage, while a mortgage broker acts as an intermediary, connecting borrowers with various lenders. Mortgage brokers work with multiple lenders to find the best loan options for their clients, considering their financial situation and needs. They facilitate the entire application process, including gathering documentation and helping submit the loan application.
What is a mortgage servicer?
A mortgage servicer is a company that manages the daily operations of a mortgage loan on behalf of the loan's owner. This includes collecting monthly payments, managing escrow accounts for property taxes and homeowners insurance and overseeing the loan's administration. The servicer ensures that the terms of the mortgage are upheld and that borrowers comply with the loan agreement.
Can I get a mortgage with a different bank than my own?
Yes, absolutely. There are no specific rules as to what mortgage provider you can use. Certain options give you better rates depending on your financial situation. That said, it doesn’t hurt to check with your bank and see if you like its mortgage options.
Do credit unions offer mortgages?
Yes, many credit unions offer mortgages to their members. In fact, many credit unions offer more affordable rates than other options for those who qualify.
What credit score do you need for a mortgage?
For most traditional mortgages, a 620 credit score is required. With FHA loans, a credit score of 580 is required. However, each lender may have its own specific credit criteria.
Bottom line
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, 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.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Fannie Mae, “Selling Guide.” Accessed Oct. 29, 2023.
- FHA.com, “FHA Loan Requirements.” Accessed Oct. 30, 2023.
- Missouri Central Credit Union, “Do Credit Unions Offer Better Mortgage Loan Rates?” Accessed Oct. 30, 2023.
- Rocket Mortgage, “What Is Correspondent Lending?” Accessed Oct. 30, 2023.
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