Is It Better to Use a Mortgage Broker or Bank?

Mortgage lender and borrowers avoiding mortgage fraud

When you're ready to start the homebuying process, you'll need to figure out where to shop for a mortgage loan. The number of companies you can choose from is nearly endless, but they typically fall into two primary categories: mortgage brokers and banks or credit unions.

Should you choose a bank or a mortgage broker to help you get a home loan? It's a fair question, given how complex the mortgage application process can be. Whether you're buying a home or refinancing, you'll need to work through a loan application, understand your loan offers, navigate escrow and finally secure your funds. You'll need to determine who will do a better job of helping you decide how much house you can afford and which loan option works with your personal circumstances.

Choosing between working with a mortgage broker or a bank, also called a direct lender, will depend on individual factors, including:

  • The strength of your current banking relationship
  • Whether or not you need flexibility in a lender
  • Referrals and recommendations
  • Who has the loan options you want

Banks and brokers are both good choices. Read on to learn more about what makes each one different.

How Do Mortgage Brokers Work?

A mortgage broker acts as a middleman between you and lenders when you're shopping for a home loan. Most mortgage brokers work with a variety of lenders, including banks, credit unions and private mortgage companies, which allows them to offer you a wider range of choices. If you have less-than-perfect credit, are self-employed or have any other special circumstances, this extra flexibility can help you find the best fit.

Having a great mortgage broker is like having a great real estate agent: They get you results you couldn't easily get yourself. Mortgages have a lot of working parts: interest rates, down payments, origination fees, points and more. A good broker can help you understand how these variables work together and what makes one loan a good value compared with another.

But be aware: Mortgage brokers work on commission from lenders. For that reason, they may have an incentive to sell you a bigger loan—or steer you toward one lender over another, regardless of what's best for you. Some mortgage brokers may charge you fees, but a great broker will be forthcoming with both loan options and good information. To help ensure that your mortgage broker is working hard for you, consider these three tips:

  • Get a referral. Recommendations from friends, family, your financial advisor or a trusted real estate agent can help you find an honest, earnest mortgage broker.
  • Ask about fees upfront. Ask your broker how they are being compensated and what fees, if any, you might have to pay for their services.
  • Do your own math. A broker can help you determine how much loan you qualify for, but it's not for them to decide how much you should borrow or which rates and terms are acceptable to you. That responsibility is yours.

How Do Bank Mortgages Work?

Getting a mortgage from your bank or credit union is a simpler process. You complete a loan application, meet with a loan officer and review your available choices. Your bank or credit union may have excellent options for you, and getting a home loan through your own financial institution may qualify you for relationship perks like free checking.

On the downside, working with one bank limits your choices. The bank next door might offer a better deal, but you won't know about it if you only talk to your bank. That could be important if your credit score might qualify you for a better rate at one financial institution over another. Even a small difference in your interest rate can cost you tens of thousands of dollars over the life of a 30-year mortgage.

Again, doing your homework is key. Learn more about qualifying for a mortgage and consider which factors might affect your loan approval, rates and fees. Familiarize yourself with going interest rates and see how your bank's rates line up. Armed with this knowledge, you'll have some idea whether or not you're getting a good offer from a bank. Do you have doubts? You can always shop around with other lenders—and a mortgage broker—to see what they have to offer before you sign.

How to Choose Between a Bank and a Mortgage Broker

Which avenue is best for you could come down to whether you already know a good mortgage broker or bank loan officer. If you have a line on a great broker or banker who is knowledgeable and trustworthy, or you've had a good experience working with your bank on a loan in the past, that might tip the scales.

If you don't have a ready contact in the mortgage business, try shopping around. Consulting multiple sources, including brokers as well as banks, is one way to get a better idea of what each has to offer. Online lending sites can also help you understand your range of available options, based on your credit score, income, down payment and home value.

Getting prequalified for a mortgage with both a bank and a mortgage broker can help you understand what your options are and compare offers. While an offer can change once you submit an actual loan application, prequalification will give you a good idea of what rates and terms you can expect. This could help you see right away whether your bank or a mortgage broker is likely to offer you the best rate and terms.

Whether you're meeting with a broker or a bank, here are a few questions to ask:

  • What loan options am I likely to get?
  • What should I expect my closing costs to be?
  • Do you see anything in my loan application that might make it difficult for me to be approved for a loan or might cause a delay?
  • Do I qualify for any special loans, such as those offered by government-backed mortgage programs?
  • How long do you expect the loan process to take?

How to Get Your Credit Ready for a Mortgage

For most people, a mortgage is the biggest and most consequential loan they'll ever get. It typically involves the largest sum of money and the longest loan term, so details matter—on both sides of the lending relationship.

Your credit score and history play a major role in whether you'll be approved for a mortgage and what your interest rate and terms will be. Before you begin shopping for a loan, be sure to prepare your credit for the scrutiny of the loan process. If your credit is in need of a reboot, you may want to postpone your home search until you can take time to rebuild your credit.

In addition to checking your credit score and report, consider these steps to maintaining your best credit throughout the loan application process:

  • Pay every bill on time. Payment history is the most important factor in your credit score. Even if you can only make minimum payments, don't be late. A single late payment stays on your credit report for seven years and will hurt your credit.
  • Minimize debt. If you can pay down any outstanding debt, particularly credit card balances, this is a great time to do so.
  • Don't take out additional loans or add to your credit card balances. Try to put off any large purchases until after your home loan is funded.

The Choice Is Yours

Taking out a mortgage is a huge financial commitment. Loan officers and mortgage brokers can be genuinely helpful to you along the way, but you'll need to rely on your familiarity with your own finances, your good judgment and your own research to decide how much loan you can afford, what interest rate is acceptable to you and what you're willing to pay in fees—to name just a few of the decisions you'll face. You can navigate the home loan application process successfully with the help of either a mortgage broker or a bank loan officer. Whichever option gets you the loan terms you need to finance your home comfortably is the right choice for you.