A Mortgage Broker or A Bank – Which One Is Right For You?

Looking for a home can be daunting, especially for first-time buyers. It’s easy to get caught up in all the steps, tasks, and financial requirements and miss out on the joy of actually going out and looking for your dream home. Most buyers go through this initial struggle because they’re afraid of making a very costly mistake.

Before looking for a house, you should first know how big a loan you can get. All lenders can give you an idea of how much you qualify for through the pre-approval process. There are two sources to choose from: a mortgage broker or a bank. Here are the things that a mortgage lender will consider when assessing how much you will be able to borrow: how much debt you have, your monthly income, and how long you’ve been at your current job.

It is essential to research your loan options and find the right lender for you. This article will explain the pros and cons of using a mortgage broker and a  bank so you can make the best decision for your situation.  Let’s get started.

Here is a quick guide that can help you determine if you should work with a mortgage broker or proceed with a bank loan application.

Banks: Why go with banks?

How do banks work? They make home loans from their funds. Their loan officers, loan processors, underwriters, and lenders all work together, and they are only allowed to sell you products that their employer offers. After the loan is approved and closed, the bank may keep it in the lenders’ portfolio or sell it to investors.  The bank’s loan officer serves as the bank’s sales force, and they make money from the commissions of the loans.

PROS

• They will work with you throughout the process and help you from start to finish.
• They offer a lower rate compared to if you decide to work with a mortgage broker. Mortgage brokers are known to have higher closing costs.
• If you already know a banker to work with, it might be a better experience for you because transactions and communication can be smoother.

CONS

• Your options may be limited because they tend to offer fewer products. There is a possibility that you won’t get or find the best loan for you.
• They are not required to disclose any information on their fees of your loan.
• There are lower chances of loan approval.

Mortgage Brokers: Is Using a Mortgage Broker better?

A mortgage broker completes real estate transactions between you, the borrower, and a lender; they are basically middlemen and collect all the necessary information and requirements that the lenders need. They will then verify all the information and conditions you have given to proceed with your real estate transaction.

How do mortgage brokers work? A mortgage broker acts as a sales force for the lenders. Mortgage lenders send their mortgage brokers rate sheets, and the list consists of the rates and prices available for each product they offer. Mortgage brokers are often smaller than banks, but they work with a variety of lenders. Like a bank’s loan officer, a mortgage broker gets paid and makes money through commission; broker fees are usually between 1% to 3% of the loan amount.

PROS

• Even if they offer higher rates or fees, mortgage brokers may be able to offer rebates.
• Because a mortgage broker works with different lenders, mortgage brokers may offer a lot more options. You will get more product choices and price points.
• The mortgage broker’s fees are transparently stated in closing costs. There will be no hidden fees.

CONS

• Unlike the bank’s start-to-finish service, the mortgage broker has less control over the process because they do not work for the mortgage lender. If your application does not get approved by the mortgage lender, your mortgage broker can’t do anything about it.
• Using a mortgage broker for your home purchase is known to be more expensive.
• Working with a mortgage broker tends to make the process longer. Take this into consideration if you are in a rush.

Use a mortgage broker if you need special assistance with your loans. A mortgage broker can easily find alternative options that aren’t advertised to you. Working with a mortgage broker will give you access to lenders you wouldn’t think to look for. Mortgage brokers can also help you get in touch with real estate agents when you are ready to purchase a home.

No matter where you live, there should be a local mortgage broker in your area. You can search on the internet to check the online reviews and comments on their service because, of course, some mortgage brokers are better than others.

Types of Mortgage and Rates

Conventional Fixed-rate Mortgages

One type of mortgage is the conventional fixed-rate option. This mortgage option requires a minimum credit score of 620 and a 3% down payment. However, you may find it daunting to pay your mortgage for 30 years (the rate for a 30-year fixed term is 2.875% with an APR of 2.942%). Don’t worry; there are shorter-term options available under the conventional fixed-rate mortgage as well: 20-year fixed rate (2.875% with an APR of 2.971%), 15-year fixed-rate (2.375% with an APR of 2.497%), and 10-year fixed-rate (2.500% with an APR of 2.68%). If you decide that the conventional fixed-rate mortgage is for you, some of the most popular agencies are Freddie Mac Home Possible and Fannie Mae Home Ready.

Adjustable Rate Mortgages (ARM)

If you prefer lower interest rates or plan to stay in your home for only a short period of time, you may want to opt for the Adjustable Rate Mortgages or ARM. With this kind of mortgage, you are offered an initial fixed rate for a period of time (3 years, 5 years, 7 years, 10 years), followed by an adjustable-rate for the next mortgage-paying years.

FHA Loans

Another loan type you may take a look at is the FHA loan. Backed by the Federal Housing Administration, the FHA loan offers the lowest score requirements among other mortgage types and lower interest rates. Aside from accepting a minimum credit score of 500, it also has a flexible down payment term for individuals aiming to get their own homes but has a limited budget.  With an FHA loan, the 30-year fixed rate is 3.250% with an APR of 4.31%, while the 15-year fixed rate is 4.331% with an APR of 4.331%.

VA Loans

For veterans and some eligible spouses, service members, and military-affiliated individuals, the Department of Veteran Affairs offers a specific loan. Called VA loans, this kind of mortgage might require a higher credit score (580-620) than FHA loans, but it does not require any down payment and also has low-interest rates. The 30-year fixed-rate is 3.125%, with an APR of 3.376%, while the 15-year fixed-rate is 3.250%, with an APR of 3.71%.

Jumbo Loans

If you are looking for more luxurious homes and are confident with your financial capacity, you may want to consider the Jumbo loans. This kind of mortgage requires a low debt to income ratio and a high credit score.  You need at least a 700 or even 720 credit score to apply for any Jumbo Loans programs.

With Jumbo loans, the 30-year fixed-rate is 3.125%, with an APR of 3.193%, the 20-year fixed-rate is 3.250%, with an APR of 3.347%. And the 15-year fixed-rate is 3.125%, with an APR of 3.25%.

Similarities and Differences

When it comes to specialization, a mortgage broker works with various lenders to be more knowledgeable on the processes and policies compared to loan officers who only focus on the offerings their bank has.

Both a loan officer and a mortgage broker gets paid through commission. The only difference is that a mortgage broker discloses his or her fees, and a loan officer does not.

A mortgage broker can offer more options because they work with multiple lenders. A bank is only allowed to offer their company’s offerings.

You can work with a  mortgage broker by submitting the paperwork online. That option is available when working with a bank, but some still require borrowers to visit the branch.

It is much more pleasant to work with a mortgage broker because they can cater to your needs and get you the best deals by thoroughly reviewing your information. A bank is not obliged to get you the best mortgage terms.

A mortgage broker is more likely to operate to assist you, and they most likely have your best interest. A bank is more likely to work towards making sure they are at an advantage.

Financial Prerequisites for buying a house

Reasonable down payment

It would be best if you had enough capital because there are many expenses to consider when buying a house. It is less likely to find a mortgage nowadays without a downpayment because the lenders want to avoid the risk of borrowers defaulting.

Affordable interest rate

There’s an excellent chance that you’ll pay tens of thousands of dollars in interest alone over the life of your mortgage. That’s why it’s so important to find a loan with a low-interest rate. This can save you thousands of dollars in the long-term.

Make sure to shop around and widen your options. Do not sign with the first bank or mortgage broker you see. Do your research and look at online reviews.

Acceptable minimum credit score requirement

Your credit history and credit report are important information any lender needs. But there’s one thing that rises from the rest, your credit score. It reflects your ability to pay your mortgage. Maxed out credit cards and debt does not look good to lenders. Choose a mortgage that accepts your credit score.