Mortgage Broker vs. Mortgage Banker vs. Institutional Lender: What’s the difference?
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When shopping for a mortgage, you’re mostly looking for the best interest rates and terms you can find, while the type of lender doesn’t usually weigh into the equation. Mortgage banks, mortgage brokers, and your local bank can all offer mortgages — but why do you need to know the difference?
That answer lies in the different processes each type of lender uses, beginning the minute you hit the submit button on that online application. Mortgage brokers, mortgage banks and institutional banks all operate very differently, and knowing those differences could help you avoid spending time and emotional energy on a lender that doesn’t fit your needs.
Understanding different types of mortgage lenders
Mortgage lenders all have access to money that you can use to buy or refinance your home. How they get the money and what happens next are all very different. Here is a brief overview of how each type of lender works.
A mortgage bank has direct access to the money you need for your mortgage loan, either in the company’s own bank account or from its investors. A mortgage banker can approve your loan application and provide the money to you directly. Very often you will end up making your payments to the mortgage bank after your loan closes, though sometimes the servicing rights to your mortgage are sold to a different investor.
All aspects of the loan approval are handled “in house.” Documents can often be uploaded to one central processing site, the mortgage processors and underwriters work directly for the mortgage bank and the closing and funding of the loan are all handled internally.
A mortgage broker has indirect access to the money for your mortgage loan based on approved relationships it has with a number of different banks. A mortgage broker can’t actually fund your loan, but he or she can help get your loan paperwork to a mortgage bank that can. The only paperwork that is in the broker’s name will be the initial application, and you generally don’t find out what mortgage bank you will be receiving money from until you get your initial loan disclosures.
Processing may still be done by an employee of the mortgage broker, but the rest of the process — from underwriting to closing and funding — will be done by the mortgage bank. In some cases, there may be a separate company that prepares disclosures or closing documents.
An institutional lender is better known as a good old-fashioned brick and mortar bank or credit union. While you may think of your local bank as the place you cash your paycheck, most of the major national banks offer mortgages at their branches.
The money for the mortgage is literally in the bank, and the bank can fund the loan from its mortgage banking department. The bank approves your loan, and provides the money to you directly. The bank can also offer other products, like checking and savings accounts or home equity loans, at the same time within the same branch.
Loan disclosures, processing, underwriting, closing documents are prepared under the umbrella of the bank, and loan documents will be issued in the bank’s name. Most institutional banks will service their own loans, and can make special approval decisions in rare cases. Underwriters working for the banks have decision-making authority for all programs offered.
Why choose one over the other?
The differences between the types of mortgage lender affect how the approval decisions are made, what options each has for any outside-the-box issues you might have or whether you have a high net worth and want to buy down your rate. Here’s a brief description of why these factors might be important to you:
Control over the loan process and decision making: The mortgage loan process is very time sensitive. Your purchase contract requires you close by a certain time, and when you lock in your rate, there is an expiration date that has to be met. If you miss the dates, you can be subject to extension fees.
Some lenders give you more control over these timelines by employing people to handle every step of the loan process “in house.” That means your paperwork, from application to approval and funding, will be handled by someone who works directly for your mortgage lender.
Access to the most mortgage products possible: Maybe you have a lot of challenges with your income, credit or assets. The more complicated your case is, the more important it will be for you to have choices of different lenders and programs.
Keeping financial products under one roof: If you have good credit, easy-to-understand income and want to have all your financial products like checking, savings, retirement and credit cards under one roof, then you’ll want to choose a lender that offers this to make your life as simple as possible.
Ability to make exceptions in decision-making: In special cases, some mortgage lenders have the ability to make a decision to approve your loan, even if you don’t meet the standard underwriting guidelines. This is a benefit, and not only if you have credit or income issues. Some mortgage lenders can make lending decisions depending on how much you have on deposit with them.
How each type of lender measures up to these criteria
Here’s how each of the types of mortgage lending platforms stacks up when it comes to these criteria.
|How Mortgage Lenders Measure Up|
|Mortgage Banks||Mortgage Brokers||Institutional Banks|
|Control over loan process from beginning to end||In-house processing, underwriting, document preparation and funding||In-house processing only||In-house processing, underwriting, document preparation and funding|
|Access to the most products possible||Wide array of mortgage product offerings, with in-house decision making||Access to multiple banks and lenders, providing more choices and niches for mortgage lending||Limited to bank’s preferred mortgage product mix|
|Access to other financial products||No||No||Yes: Checking, savings, retirement accounts, credit cards, personal lines of credit, etc.|
|Exceptions in decision making||Yes. Some can keep loans in house on case-by-case basis||No, but multiple lender choices may offset this||Yes, in some cases for high net worth or low-income customers.|
Why choose a mortgage bank
When you are going through the loan process, it’s helpful to know who to talk to. There can be a dozen or more different people involved in the loan approval at various stages.
Mortgage banks employ people who are trained and specialize in each step and work together within the same company. All the phone calls and emails you will get are from the same company, which helps prevent confusion and keeps you informed along the way.
Why choose a mortgage broker
Not all banks offer the same product. Many of them prefer to specialize in certain types of loans, rather than be a one-size-fits-all lender. For example, some banks won’t finance condos, or manufactured homes.
A mortgage broker can give you access to the product offerings of a variety of different mortgage banks. If one bank doesn’t have a loan program that fits your specific needs, chances are there’s another one that does. Mortgage rates and fees will vary from bank to bank, and the mortgage broker will disclose these differences once a final lender has been chosen.
The loan process and documentation is usually handled by someone who works for the mortgage broker, but once a lender is selected, you’ll start to get emails and correspondence from the lender instead. There may be different people involved in preparing your closing documents and funding your loan as well.
Why choose a traditional bank, or institutional lending
Mortgage banks and mortgage brokers only offer mortgage products. Institutional banks offer everything from checking and savings accounts to credit cards and investment and brokerage products — mortgages are just one of many things they offer.
The loan process is handled completely within the bank’s mortgage department. However, your paperwork will likely be processed at a large regional center that receives loans from multiple states. This can sometimes be a disadvantage if the banks are receiving a large influx of new mortgage applications in your region. Be sure to ask your institutional bank mortgage loan officer how long it is taking on average for them to approve new loan applications before you get too far in the loan application process.
Lending decisions can be influenced by how much you have on deposit with the bank, especially if you have a large balance. The bank can choose to make underwriting exceptions if you have sufficient assets and a history with the bank to verify your ability to repay.
You may prefer “under-one-roof” financial services. Having your checking, savings, credit cards, car loans and investment portfolio managed in one place can make life easier. It also means the bulk of your financial documents will be at the fingertips of the employees at your local bank, which adds simplicity to the mortgage loan process.
Which type of lender offers the best rates?
No matter where you go, lenders will generally advertise that their rates and fees are competitive. Mortgage banks, mortgage brokers and institutional banks all have the ability to compete for your business by offering good rates and reasonable fees.
The rules of rate shopping are the same regardless of which type of mortgage lender you choose: Get an itemized written cost estimate on the same day from each one and then haggle with them to see who is willing to compete.
Mortgage banks and institutional banks will generally price the costs for underwriting and approving your loan as a flat fee. This fee will be lumped as an origination fee on your cost estimate.
Mortgage brokers have different requirements for disclosing fees. The actual compensation a broker receives for services has to be disclosed as a cost estimate. Mortgage banks and institutional banks are not required to disclose how much their profit is on a loan, so at first glance, it may look like the fees at a mortgage bank or institutional bank are lower.
It’s important to look at the total costs, and the rate to determine how all the costs and credits towards the costs affect your bottom line.
The bottom line
You probably won’t know whether you are working with a mortgage bank or a mortgage broker unless you specifically ask. Mortgage banks often advertise more about the ease and speed of their processes than they do about having the lowest rate, whereas mortgage brokers will pitch the number of choices they have to offer the best rates and a loan program to fit most mortgage needs.
Large institutional banks and credit unions have the advantage of being able to offer other financial products that mortgage banks can’t, such as savings and checking accounts and personal loans. The length of time you’ve banked there, combined with how much you have in your accounts, may have an impact on the terms and process.
If you need the benefit of multiple choices of programs and rates due to nuances with your credit, income or source of down payment, mortgage banks and mortgage brokers will offer the most choices to fit your needs.
If you have a high net worth and there is not as much time urgency to your closing, big banks will likely have the best options for your needs.