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Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Mortgage Broker or Bank: Which Has the Best Mortgage Rates?

winter-home-exteriorIf you're trying to find the best deal on a mortgage, where should you go? To a mortgage broker or a bank? Who offers the best mortgage rates? The biggest selection of products? The fastest processing time? Let's break it down and find out.

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Mortgage brokers vs banks: what's the difference?

  • Mortgage brokers and mortgage bankers both offer home loans. But they do it in different ways, and those differences could matter to you. Mortgage banks can process, approve and fund loans faster because they control the entire workflow.
  • Mortgage brokers can compare offers from many lenders and have access to a wide variety of products. They may be better able to help you if your situation is unusual or you need a specialty product like a bank statement loan.
  • Both brokers and bankers can offer the best mortgage rates for a specific product and on a given day. They operate differently, but both business models can provide great deals.

How do mortgage banks work?

Mortgage banks only sell products that they underwrite and fund themselves. Their own employees assist you at every stage:

  • Loan officers or mortgage originators help you choose a mortgage product and the price and rate structure that works best for you.
  • Loan processors or loan officers help you complete your application. They will usually submit it to an automated underwriting system (AUS). The AUS generates a recommendation (approve, refer, decline). And, if you're approved, it issues a list of conditions to finalize your approval. Your processor or loan officer orders a home appraisal.
  • Underwriters examine your conditions and the home appraisal and sign off on them. You are then cleared to close.
  • Closers issue a final set of loan documents, which you sign.
  • Funders examine the executed closing documents and a release the money to fund your home purchase or refinance.

Because the loan officers, processors, underwriters, closers and funders all work together, the process is often faster and more seamless. However, loan officers can only sell you their bank's products. If the best loan for you is a 100% USDA mortgage, or a bank statement loan for self-employed applicants, and the bank doesn't offer it, you probably won't hear about it. And you definitely won't hear if another lender has a lower rate for the same loan.

Related: How to Shop for a Mortgage This Year

How do mortgage brokers work?

Mortgage brokers don't sell their own products. They function as the sales force for wholesale mortgage banks. Note that many larger banks have both wholesale divisions and retail offices. Instead of employing salespeople to market their products, wholesale lenders use mortgage brokers to perform the same function.

Your broker or a loan processor helps you choose a product and takes your application. He or she generally submits your application to an AUS and gets a list of conditions.

With a broker at this stage, there are more products from which to choose. If your application does not receive an approval from one lender, the broker can try another. In addition, the broker can choose among several wholesale lenders to find the best pricing that day.

Another difference is that conditions and requests go through an additional layer of communication. After you submit your conditions, the broker must transmit them to the wholesale lender's underwriting department. This can add to processing time. Closing and funding also has an extra layer in the communication and process. If you need to close very quickly, this can be an issue.

Who offers the best mortgage rates?

Either provider can produce the best deal for your situation. Mortgage banks make their money by collecting interest from you over time or by selling the loan to investors or servicing companies. Mortgage brokers make their money by either charging you a commission to obtain a loan or by receiving a commission from the wholesale lender.

The bottom line is that you can find the lowest mortgage rate with a broker or bank. The most important thing is that you compare several quotes from competing lenders. And at least one should be a broker and one should be a bank.

Related: Should You Use Your Realtor's "Preferred" Mortgage Lender?

How to compare mortgage brokers and banks

Shopping for a mortgage can be confusing because of the variables involved. For example, how do you know which loan is cheaper - a $200,000 mortgage with a 4% interest rate and a cost of $4,000, or a loan with a 4.5% rate costing nothing? Yes, you can compare both loans' annual percentage rate (APR). APR is supposed to make that comparison easier. But there are many issues with APR. The chief flaw is that it's only accurate if you keep your mortgage for its entire term.

You can simplify the process by taking one variable off the table and shopping for the other.

  • Set your targeted costs and then choose the loan with the lowest interest rate; or
  • Establish the rate you wish to pay and then choose the loan with the lowest cost.

If, for instance, you want an interest rate of 4%, contact at least four lenders and give them your requirements. You'll also need to provide an estimated credit score, down payment (or property value and loan payoff for a refinance), property type (condo, manufactured home, traditional house, etc.) and use (primary residence, second home, rental).

You should receive either a Loan Estimate form or some sort of worksheet or loan scenario listing the loan's interest rate and fees. Pick the loan with the lowest costs.

Pros and cons

The main drawback of mortgage brokers is that they don't underwrite or fund their own loans. So communication can take longer and there are more opportunities for things to go wrong.

The primary drawback for mortgage banks is the limited selection of products. And if you don't shop around, you don't know if that one bank is the lowest-priced provider. A broker, on the other hand, can shop your loan for you - looking for the best rate for which you qualify and the features you want.

You can get the best of both worlds by comparing offers from both sources before committing to anyone.

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