Mortgage broker vs. bank or mortgage lender: Which is best?

Gina Pogol
The Mortgage Reports contributor

Mortgage broker vs. bank: Who offers the best mortgage rates?

When you’re shopping for a home loan, you have two main sources of money — a mortgage broker or a bank (also called a “direct lender” in the mortgage industry).

One might be better than the other for you, depending on your circumstances.

Someone with a high credit score, for instance, might make a different choice than an applicant with a lower score.

The key is to get quotes from both sources and compare offers. You might be surprised at the difference.

Compare loan offers from multiple sources (Oct 27th, 2021)

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Types of mortgage lenders

Whether you’re a first-time home buyer or a homeowner looking to refinance, your goal is probably to find the best rate and lowest fees on your new loan.

To find a great deal, you have to shop around with a few different lenders and compare offers.

You also have to choose the type of mortgage company you want to work with. There are two main options.

  • Direct lenders (‘banks’) — Financial institutions that originate, process, and fund the loans themselves. In other words, the company you work with is the one lending the money. Direct lenders include big banks (like Wells Fargo), credit unions, and mortgage companies that specialize in home loans (like Quicken)
  • Mortgage brokers — A broker is a ‘middleman’ that helps match you with the best lender for your needs. Brokers work with multiple ‘wholesale’ mortgage companies, so they can act as a single point person to help you compare multiple loan options

Does it matter whether you choose a mortgage broker or a bank? It might, depending on your needs.

For example, you may be able to save time and money with a bank if your loan file is straightforward. But banks don’t have to disclose what they make on your loan, so you may pay more than you should if you don’t shop aggressively.

If your mortgage application involves challenges — like a low down payment or poor credit score — a broker might be able to help.

Keep in mind, you’re not restricted to looking at only mortgage brokers or only banks. You can apply with as many different lenders and types of lenders as you want.

To get the best of both worlds, obtain loan quotes from at least one broker and one bank when you shop for a mortgage to see which can offer you the better deal.

Find your best mortgage loan offer (Oct 27th, 2021)

Mortgage broker vs. bank

In general, if your loan is a straightforward transaction, and your credit, income, and assets are strong, you may be able to save time and money with a bank.

If your application involves challenges, a broker who knows which lenders are most flexible can help.

For instance, a broker might be best if your FICO score is 580 and you have a sparse credit report, because you’d be right on the borderline of qualifying for an FHA loan.

A good broker would know which lenders are lenient on credit and more likely to approve your application.

That said, many brokers today offer competitive pricing in line with that of direct lenders. And many banks today have a larger variety of programs. Look for portfolio lenders if you need something really creative. (These are banks and lenders that service their own loans in-house, rather than selling them to end-investors on the secondary market.)

To get the best of both worlds, obtain loan quotes from at least one broker and at least one bank when you shop for a mortgage.

Mortgage lender vs. bank

Specialized lenders that only do home loans — like Rocket Mortgage or Better Mortgage — are generally lumped into the ‘bank’ category.

They’re direct lenders, just like big banks. However, they don’t offer other financial services like credit cards or checking and savings accounts.

These types of lenders typically only do home purchase and refinance loans. They might also offer home equity loans or home equity lines of credit.

Often, though not always, mortgage lenders are less conservative than banks. So they might be more flexible about outside-the-box applicants, like those with lower credit scores or bigger loan amounts.

For instance, New American Funding — a mortgage lender — allows credit scores as low as 580 for FHA loans, whereas Wells Fargo — a big bank — requires at least 600.

Another specialized mortgage company, Caliber Home Loans, can do jumbo loans with as little as 5% down payment. You’d be hard-pressed to find a big bank that would go so low.

When it comes to rates, there’s no hard-and-fast rule about mortgage lenders vs. banks.

The rate you’re offered has more to do with your qualifications — credit score, down payment, loan amount — than the specific lender. So make sure you shop around with a few different companies to see which can offer you the best deal.

Verify your new rate (Oct 27th, 2021)

How direct lenders work

Direct lenders — including banks, credit unions, and online lenders — use their own money to fund mortgages. And their loan officers, processors, and underwriters all work for the same company.

That means you can go right to the source if you want a loan from a direct lender. For instance, if you want a home loan from Rocket Mortgage, you can go directly to Rocket and fill out a loan application.

Loan officers (LOs) serve as the bank or lender’s sales force. They usually earn commissions for originating mortgage loans, and the prices they charge may not be negotiable.

In addition, bank loan officers can only offer loan programs in their own portfolio, and that can limit the options available to you.

For example, if a direct lender isn’t approved to do zero-down USDA mortgages, its loan officers will never be able to offer you one. They might not even mention a USDA loan as an option — even if you’re eligible.

Banks can still be flexible with mortgage pricing, though.

Loan officers can offer the same mortgage at various price points, from “no-closing-cost” loans with higher rates, to loans with “discount points” that cost more upfront but have reduced interest rates.

When you’re shopping with direct lenders, it’s up to you to ask about the pricing options available and negotiate the rate-and-fee structure you want.

Pros of mortgage banks

Here are the pluses of dealing with a mortgage bank or direct lender.

  • You have more control over the application process. You get to hand-select the banks and lenders you want to shop with and negotiate your own interest rate and origination fees
  • They work on your loan from start to finish. Your loan officer deals in-house with fellow employees and may have more control and communication during the underwriting process
  • If working with a brick-and-mortar institution and a banker you already know is important to you, your local bank may offer the best experience

Cons of mortgage banks

Here are the drawbacks of working with a bank instead of a broker.

  • Unlike brokers, banks don’t have to disclose what they make on your loan. You may pay more than you need to if you don’t shop aggressively
  • Mortgage banks tend to offer fewer products. If they don’t sell the loan that’s best for you, they may not tell you about it (or even know about it)
  • A conservative bank may not approve you, even if you’re a good candidate for financing

How brokers work

Mortgage brokers work with a variety of lenders, which gives them access to many products at many price points.

That means you can go to one mortgage broker and compare multiple loan programs. The broker will help you understand the interest rate, closing costs, and other details of each offer to find the best loan.

If you want to compare loan programs and rates from direct lenders, you have to apply with each one separately and evaluate them on your own. However, this is not as intimidating as it might sound. All lenders use a standard Loan Estimate form detailing their offers, so mortgage options are easy to compare side by side.

Similar to banks, brokers can offer “rebate pricing” to help reduce closing costs when buying a home or refinancing.

This rebate is also called a Yield Spread Premium, or YSP. It involves accepting a higher interest rate in exchange for lower upfront costs.

For loans with lower rates, the borrower pays the broker’s commission, usually about one percent of the loan amount.

Brokerages are often smaller than banks. And if you work with a broker, it’s likely you’ll have more human-to-human contact as the two of you work through your loan application.

With a bank or direct lender, on the other hand, borrowers can often apply online and may even be able to complete the full mortgage process digitally.

Your real estate agent or Realtor can give you referrals for reputable brokers in your area if you want to go this route.

Pros of mortgage brokers

Brokers operate differently than mortgage bankers. Here are the upsides.

  • Brokers have access to loan programs and interest rates from a variety of lenders. They may provide a better and more specialized product to those who need it
  • Brokers can set their own profit margins and may be easier to negotiate with
  • The broker’s compensation is clearly disclosed on your closing statement

Cons of mortgage brokers

Mortgage brokers also have their drawbacks.

  • Brokers have less control over the underwriting process because they don’t work for the lender. If the wholesale underwriter puts your file on the back-burner, your broker may not be able to do anything about it
  • Brokers tend to be more expensive. But that may be because they get more complex loans, and HUD says that complexity does drive up lender costs
  • Brokered loans can take longer to close. This could be a concern if you have a tight deadline for home buying or refinancing

What are today’s mortgage rates?

Today’s mortgage rates from mortgage brokers and bankers are highly competitive. To get the best deal on a home loan, experts say you need at least three or four quotes.

In the end, it doesn’t really matter which type of lender you choose as long as you know you got the best deal available to you. You can only find that out by shopping and comparing.

Verify your new rate (Oct 27th, 2021)