Getting a mortgage with your bank might be a bad idea

September 16, 2022 - 7 min read

Should I get a mortgage through my bank?

When it’s time to apply for a mortgage, many borrowers’ first move is to contact their bank. It makes sense. You already have a relationship with your bank and it should know all about your financials — right?

In fact, getting a mortgage from your current bank will require just as much time and documentation as getting one from another lender. And your current bank won’t necessarily offer you the best interest rate. By automatically choosing the bank you already work with, you could miss out on huge savings on your home loan.

So how can you choose between your current bank and another mortgage lender? Here’s what to do.

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Is it easier to get a mortgage with your bank?

There’s no shortage of options when you need a home loan. Consumers can choose to work with their local bank or credit union, a specialty mortgage lender, an online bank, or a mortgage broker. But many people start the mortgage process with their bank without giving it much thought. “My bank already has my information,” they think, “so getting a mortgage should be quick and easy.”

Contrary to popular belief, though, having an existing relationship with a bank won’t make the mortgage application process go faster.

For example, the personal information from your checking account, credit card, or savings account won’t just auto-populate into your mortgage application. You’ll still have to provide bank statements, tax documents, paystubs, and other standard mortgage documentation. In fact, the application process may even go slower if your local bank hasn’t adopted a modern, online process.

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What if my current bank offers mortgage discounts?

Being an account holder doesn’t necessarily mean you’ll get a better deal on your mortgage. While some banks offer mortgage discounts, such as closing cost rebates, these need to be considered as part of the bigger picture. A $500 closing cost discount won’t make much of a drop in the bucket compared to another lender offering a significantly lower rate.

That’s why it’s so important to compare loan offers from multiple lenders and choose the best deal overall.

Shopping around for your mortgage pays off

The majority of home buyers begin their search by looking online at homes for sale. Often, after seeing photos of a home that piques their interest, they contact an agent so they can view the property. Only after that do they make a plan for financing.

This has become normal when buying a new home. Buyers look at listings first, then contact an agent to view homes, and don’t worry about the mortgage until they’re already set on a place.

It can make intuitive sense to find the right home before thinking about a mortgage. That feels natural. But by home shopping before you find a lender, you limit your window to shop around and compare Loan Estimates — and shopping around is key to finding the best interest rates and lowest closing costs.

When there’s competition to buy and you’re in a time crunch, you’re more likely to go with the first lender you find — maybe your current bank — which often isn’t the best deal.

Getting the lowest mortgage rate can save you thousands or tens of thousands of dollars in the long run. Your lender is also key to helping you find the right loan program and maximize your home buying budget. So set yourself up for success by finding a lender first and house hunting second. That way, you won’t be in crunch mode and willing to go with whichever lender seems easiest when you’re ready to buy.

A real-life story where “working with our bank” went wrong

There’s a reason many Realtors don’t refer their buyers to big banks. Allison Barnett of the Barnett Realty Group in Marietta, Ga., can speak to this first-hand.

In one instance, Barnett was working with first-time home buyers the Wilsons. Like most first-time buyers, the Wilsons were excited to start their home buying journey. Also like many first-timers, the Wilsons assumed their bank, which they’ve been with for many years, would be the natural place to get a mortgage.

Bank hours can limit accessibility

After contacting their bank, the Wilsons met their first hurdle. The saying “banker’s hours” — referring to an in-late-out-early attitude — certainly applied in this case.

Like many young couples, the Wilsons both had full-time jobs. This made it difficult to connect with their bank during business hours. And contacting their bank on the weekend was equally challenging. Even though some branches were open on Saturdays, loan officers and processors were unavailable until Monday.

After making arrangements to speak to someone during their lunch hour, the Wilsons finally spoke with a mortgage loan originator.

A bank’s mortgage pre-approval process can be slower

Seven days later, the couple was told they were pre-approved to buy a home with a purchase price of $205,000. On a side note, they didn’t realize that many lenders can get you pre-approved in just 24 to 48 hours. Pre-approval in hand, the Wilsons set out to find their dream home and eventually had an offer accepted. But then things got rocky.

From nightmare to happy ending

Roughly 10 days before closing, both the buyers and Barnett were in a state of panic about whether the sale could go through. Not only had their calls and emails gone unreturned for several days, after finally escalating their concern to management, they were informed their loan had been declined. The reason? According to the bank, one simple document had not been received.

The Wilsons could have easily provided the document in question and possibly revived their mortgage loan with the bank. However, neither the Wilsons nor Barnett had any confidence in the bank at this point.

Fortunately for the Wilsons, their real estate agent contacted a different lender who helped get the home buying process back on track. They closed the loan in just 17 days. Not only did this save the couple’s earnest money deposit, but they didn’t lose out on purchasing their dream home, either.

The lesson

The stress and hassle of switching lenders mid-process could have been avoided if the Wilsons had shopped for a better, more responsive lender before starting the mortgage process. Not all big banks are bad by any means. But it’s important to carefully vet your lender — including its rates, fees, and customer service — before diving in.

Buying a home is one of the biggest financial decisions most people ever make, and working with the right lender has the potential to make or break the deal.

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How do you know if your bank is a good lender?

There are a number of myths out there when it comes to getting a mortgage loan. This is especially true with regard to mega-banks.

Even though your bank has a recognizable name, even though it has been around for a while, even though you have other accounts there, even though the bank has a big sign out front advertising mortgage rates, working with a mega-bank may be a mistake.

You can find out whether this is true for your bank by shopping around and doing research. Just about anything you need to know about a mortgage company is available on the internet. While no company can make everyone happy 100% of the time, if you see a trend, there’s usually a reason.

You can also ask your Realtor for a lender recommendation. Agents can often recommend lenders with a good local reputation for speed and customer service.

Does your bank offer the type of mortgage you need?

Another thing you should consider is whether or not your bank offers the specific type of loan you need. Most lenders provide conventional loans, which follow guidelines set by Freddie Mac and Fannie Mae. The majority of home buyers use conventional loans, but a sizable minority of buyers will need a different program.

FHA loans, for example, are a popular alternative that can accept credit scores as low as 580 and down payments starting at just 3.5 percent. Other options include VA loans, which allow military members and veterans to buy with no down payment, and USDA loans, which help moderate-income home buyers in rural areas.

Still other home buyers will be better served by a specialty program. Some borrowers need flexible underwriting to get their loans approved, and not all banks can provide it. Check with your lender in advance if you need:

  • 3% down conventional loan options: Fannie Mae and Freddie Mac feature special loan products, such as HomeReady and Home Possible, that allow buyers to put 3% down. These programs may not be offered by every lender
  • Self-employed mortgage: Self-employed people have a harder time documenting their income so their lender can measure debt-to-income ratio. They’ll often need to share tax returns instead of pay stubs, and not all banks can do this
  • Jumbo loans: Jumbo loan amounts exceed conventional loan limits so borrowers can finance higher-value homes. Check with your lender in advance if you need a Jumbo loan

Also, if you’re doing a refinance, check with your loan provider about its home equity requirements. Many lenders want to see at least 20% in home equity for a refi but some may have looser requirements.

The bottom line: If you need a specific type of mortgage loan, be sure your lender offers it. Your bank won’t necessarily offer the program that works best for you.

Check your home loan options. Start here

Compare rates and fees carefully when you shop

Probably the best reason to look beyond your neighborhood bank for a mortgage loan is that you could save serious money. The more you shop around, the better chance you have of finding a lower interest rate and lower upfront fees.

Few home shoppers will buy the very first home they walk through. But they might get the first loan offer they see, thinking all mortgage lenders work the same way.

In reality, different lenders will interpret your unique financial situation differently. Getting quotes from three or more lenders gives you a chance to find the lender whose mortgage options line up best with your needs.

When you’re buying or refinancing something as expensive as a house, a little improvement can go a long way. Shaving just a quarter point off an interest rate, or getting a lower mortgage insurance rate, can save thousands of dollars.

Don’t go with the first lender you find

Shoppers who do their research and find the best mortgage lender can save thousands — even tens of thousands — over the life of their home loans by avoiding higher interest rates.

And remember: While finding the lowest rate is important, good customer service and communication shouldn’t be compromised. So don’t go with your bank just because you deposit your paycheck there. A bank can be really good with checking and savings accounts but not so great at mortgage loans.

Start by getting prequalified — or better yet, preapproved — to see what different lenders will offer based on your credit report, income, and debt. You might be surprised at the difference you see between loan offers.

Time to make a move? Let us find the right mortgage for you

Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.