Mortgage Broker vs Small Lender vs Big Bank
For many people, small lenders are better than big banks. For others, a broker may be best. The answer for you may be different based upon your own needs and financial situation.
At least half of the home buyers today will find themselves in a situation where a conventional mortgage simply will not work for them. Small lenders may offer solutions that the big banks are not offering, and brokers may provide a few as well. The interest rates you may find between them all also may vary. This will impact your decision as to which direction to take with your mortgage.
We will take you through the differences between them, so you can decide whether a mortgage broker, a small lender or a big bank is best for you. Then, we can help connect you with a lender that will make the most sense based upon your unique loan scenario.
Choosing a Big Bank for a Mortgage
Big banks are where virtually all home buyers would go for their mortgages years ago. I am taking us back to a time when there was no internet and there was just a handful of options to find a mortgage. People had their bank accounts there, the safe deposit boxes, and the big bank located in their neighborhood was trusted. Plus, they had nowhere else to go
One of the differences today is these big banks have so many different business models. Only a portion of their income is derived from lending money. They all have credit cards now too and other services. So, they really are not begging for your mortgage business.
The big banks are also not willing to take many risks when it comes to lending money. They want only the best applicants with great credit and a nice down payment. They really do not want to deal with having to chase after you for a payment. This also means they will not have the unique and creative mortgage programs to help borrowers with their unique situations.
You will not find bank statement loans for the self employed buyers, mortgages for people with recent bankruptcies, or even loan programs for people with bad credit. That simply is not what they do. So, if you do not fit into their perfect box as a customer, they really do not want to offer you a mortgage.
Pros and Cons of a Big Bank
- Well known and provides a feeling of comfort
- Bundled discount for using multiple services from them
- Fewer program options
- Higher credit scores required
- No special programs for self employed
- Very rigid underwriting standards
- Big banks do not always have the best rates
When it comes to the mortgage business, bigger is not always better. Lately, we do not see many benefits at all to using one of the big banks for a mortgage.
Choosing a Small Lender for a Mortgage
Small lenders have become more mainstream over the past decade. When we say small lenders, we mean as compared to the big banks. Many of these small lenders are still national lenders but their primary business is mortgage lending and are much smaller in comparison.
Small lenders sometimes do not have a local branch that you can walk into. You will usually find them online or they may also work through a network of mortgage brokers.
One of the many benefits of a small lender is they often keep the loan in their portfolio. As a result, they are able to develop loan programs that are not Fannie Mae eligible. On the surface this sounds bad, but this may be good news for you. Fanny Mae guidelines are rigid and do not allow for creative financing.
These smaller lenders are the ones that have bank statement loans, mortgages for those who have recent bankruptcies, bad credit mortgages, ITIN loans for immigrants who do not have a social security number, and more. The mortgage rates offered by small lenders are also competitive when compared to the big banks.
Pros and cons of a small lender
- Flexible underwriting guidelines
- Creative loan programs
- Bad credit scores mortgages available
- Often will allow low down payments without PMI
- Competitive rates
- Less red tape which means faster closings
- Less well known to most potential borrowers
- Difficult to find them and a simple google search will not always work
- Some of the niche programs for bad credit may have higher rates
These smaller lenders are becoming more mainstream and really are offering great programs. It would be a mistake not to consider a smaller lender if you are shopping for a mortgage. Since they are not easy to find and they all have different programs and guidelines, we can help you.
Choosing a Mortgage Broker for a Mortgage
Mortgage brokers are extremely common and can be found everywhere. A mortgage broker is essentially a middle man between yourself and the bank or the small lender. The broker will represent a handful of banks and lenders which means they will have access to more than your local bank.
Mortgage brokers need to get approved by each of the lenders to originate loans for them. As a result, they are not working with ALL of the possible lenders out there and sometimes do not truly have access to the best programs or the best rates. They likely can get you a competitive rate and there is a chance they are working with a lender that has the right niche program for you.
In the past, mortgage brokers were able to put you into loan programs or with lenders that paid them a higher commission. The rates they offered you also had an impact on the commissions they would earn. However, some recent legislation has limited them when it comes to their compensation and there is less risk that you may be steered into something that is not right for you.
Mortgage brokers also were unfairly blamed after the mortgage melt down. They really do offer a variety of mortgage programs and have access to competitive rates.
Pros and Cons of a Mortgage Broker
- Access to multiple lenders
- They offer a variety of mortgage programs
- Can find competitive rates for you
- Usually have an in-house loan processor to help with your application
- They have the ability to switch lenders if needed.
- May not be representing the best lenders
- May not always have the lowest rates
- Potential to have an additional fee
If your realtors’ preferred lender is a mortgage broker, then it is a good idea to speak to him or her to see what they have to offer.
Final take on a Mortgage Broker vs Small Lender vs Big Bank
All three are options that you should investigate and ultimately the decision is yours to make. You need to feel comfortable with the company and the loan officer. The mortgage program has to make sense for you. Do not let any lender try to squeeze you into a program if it is not right for you.
One of the very unique advantages that we offer here is that we work with all of the above. We have developed relationships with all of the significant lenders for the past two decades. We already know who has each of the programs and solutions and the best rates for each. It would be a good idea to discuss your options with us in addition to a local small lender or a broker.
Is it better to get a mortgage from your bank?
It is good to check in with your local bank when you are looking for a mortgage. However, if you do not check with other lenders, you are likely going to miss out on a mortgage program or a rate that is right for you.
Are non-bank lenders safe?
The non-bank lenders are working under the close watch of the federal agencies and need to adhere to specific lending laws. They are absolutely safe and in some instances are safer than the large banks. Wells Fargo had a major security breach where customer’s private data and account information was accessed by a third party. So, even large banks are not completely safe.
How do mortgage brokers get paid?
Mortgage brokers earn a commission from the bank or lender after your loan closes. It is a percentage of the total loan amount and the higher the rate, the higher the commission. However, since competition in the lending business is high, your mortgage broker will look to provide you with the lowest rate needed to earn your business.
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