There are several sources from which to obtain a mortgage. Each source operates under a certain set of guidelines and serves a specific purpose in the mortgage process. There are several places to find the best fit for your particular purchase and financial situation.
Bank (Direct Lenders)
The original source of mortgages since the establishment of the first American commercial bank in 1791.
Obtaining a mortgage directly from the bank means you cut out the middle man but increase the leg work you need to put in when shopping for rates.
Direct lenders can only offer you what their specific bank offers meaning you’re limiting yourself to their rates and fees. However, if you’re shopping for a mortgage at a bank where you have several accounts open, you may be able to negotiate lower fees based off your current banking relationship.
Pros: Possible lower fees because you’re cutting out the middle-man (mortgage brokers) and going straight to the source of the loan.
Cons: Stricter qualification guidelines and higher credit expectations, limiting yourself to the rates and fees they charge, less personalized service.
Ideal for: Someone with a straight forward financial history that already has an established relationship with the bank and high downpayment (20%+).
Some people pride themselves on the tedious amount of hours they spend searching for the best possible deal in any purchase they make. Others can’t be bothered to cut out a coupon from a magazine.
If your disdain for shopping and deal searching carries into your financial life, call a mortgage broker when searching for a home loan.
Brokers shop your mortgage inquiry to multiple lenders from multiple sources (banks, non-bank lenders, etc.) to find you the best deal.
Pros: Guide you through the entire loan process. Present you with various loan options from various lenders so you don’t have to shop the best rates or fees yourself.
Cons: Higher fees than a direct-lender. May prefer to pair you with a lender that pays them the higher commission as opposed to the one that offers you the best deal. Possible delays leading up to the closing due to indirectly acquiring the loan.
Ideal for: A home buyer who does not have the time to shop for a loan or prefers to leave the responsibility to a broker.
The internet has gradually streamlined and consolidated financial processes that were once slowed by paperwork and meetings. Now you can shop for mortgages in your underwear while sitting on your couch. Some companies even allow buyers to qualify for a mortgage in less than eight minutes.
Alternative Lenders (online lenders) use algorithms that take into consideration many factors when assessing loan risk. Generating greater insight allows these companies to get higher-risk mortgages approved. In short: when more data is gathered, you have a higher chance of qualifying because your approval is no longer based on limited criteria.
Pros: Lower fees due to less company overhead. Higher chance of loan approval.
Cons: Less one-on-one guidance through the process, possibility of fraud increases (watch out for scams).
Ideal for: Buyers with low credit scores and complicated financial history that have been rejected by a bank. Buyers looking for a largely automated and quick approval process.
A credit union is a non-profit financial institution owned by the members that use it’s services. These members elect a board of directors to manage the day-to-day duties. A credit union serves the same functions as a traditional bank by accepting deposits, creating loans, and offering savings accounts.
Because a credit union does not need to make a profit, it can offer lower rates and be more forgiving with their fees. Deposits stay within the organization and allow for members’ savings to be repurposed for loans creating a beneficial environment for all it’s owners.
Membership in a credit union is based on employer, family, geographic location, and membership in a specific group. You can find a credit union in your area and learn more about it’s ownership benefits by clicking here.
Pros: Personalized service due to membership status. Lower fees, lower rates.
Cons: Must be a member to qualify for a mortgage. Mortgages are often sold to the secondary market after closing meaning you communicate with a loan servicer instead of your credit union.
Ideal for: Buyers who qualify for membership in the credit union.
It’s important to ask yourself how involved you’d like to be throughout the shopping process. Are you comfortable shopping for the best rates and fees yourself or would you rather have someone handle this for you? Whatever your inclinations are, there’s an option for you.
If you missed the first part in this series, click here: Part 1: What type of mortgage fits you best?