When it comes to buying a home, there are a lot of moving parts and the process can be confusing. From the moment you start the home buying process to the day you end up paying off the mortgage, there is a lot to think about and a lot to figure out. One of the biggest things is where you should get the mortgage. And there are a lot of options with that, too.
What’s Better- Traditional Bank or Mortgage Company?
You want to make the right decision as it can affect you for the next 30 years- or however long your mortgage term lasts. Two of your options are to get your mortgage through a traditional bank or mortgage company. Both of these have benefits and risks associated with them, so how do you know which to choose? It starts with understanding them both and weighing out the pros and cons of each.
When talking about a traditional bank, we are referring to the financial institutions through which you can open a checking account and savings account. Most people are familiar with traditional banks more so than other financial institutions because they are referred to more often than others. When it comes time to get a mortgage loan, traditional banks are usually the first lender’s people think of. Here are the pros and cons of using a traditional bank for a mortgage:
- Traditional banks usually have one- sometimes a couple- of people dedicated to mortgages. These mortgage bankers are specialized in the home loan products that their bank offers. They can often look at your financial situation, determine if you are a good fit prior to applying for a mortgage and if you are not, let you know exactly what you need to work on to fix it.
- Most often, the banker is employed by a bank that either you, a family member or a friend have experience with. Sometimes- though not always- this can help you out a great deal because there is a foundation there that you can build on.
- Traditional banks often pay their mortgage bankers a salary, meaning that you are not paying extra for fees.
- A mortgage banker is specialized in the bank’s products, but that is about it. If you are not a good fit with that particular product- or those products- you are pretty much out of luck.
- A traditional bank tends to have a pretty stringent approval process. There is not a lot of flexibility involved.
- Because the banker gets paid a salary, they have no real vested interest in you getting a loan. They get paid regardless. Obviously, if they never approve loans, the bank would probably not be very happy with them, but whether or not you, in particular, get a loan is not a factor in their pay.
A mortgage company is quite different from a traditional bank. They are strong in the areas traditional banks are weak, but they do have their own struggles, too.
- A mortgage company is often associated with a much wider range of lenders and financial products. What this means for you is that they have more options when it comes to connecting you with a loan. Let’s say that one of their associate lenders only approves a 680 credit score and a DTI of 30 percent. For some people, this would mean they might as well hang up the idea of a mortgage at this time. However, as mortgage companies have many lending partners, they may also have a lender who is willing to approve a 580 credit score with a DTI of up to 50 percent. In this sense, a mortgage company can often get more people approved than traditional banks can.
- As mortgage companies specialize in their lending partners, they can usually take a look at your financial situation and easily determine which lenders will probably approve you. This saves you from having to apply to a long line of lenders that you may not have a shot within your current state.
- Because a mortgage company runs off of commissions, performance-based fees, and affiliate sales, they do have a vested interest in you getting a loan. This typically means that they are going to work hard to get you approved for a loan.
- Mortgage companies are also often associated with reputable credit repair organizations or at least have names you can work with. If they see that your financial situation may not yet be where you need it to be, they will often guide you in the direction you should go to make it what you need.
- Mortgage companies also have a much better chance of providing you with multiple interest rate options. Where a traditional bank is mostly stuck in a box when it comes to interest rates and terms, a mortgage company has a wide range of lenders that offer varying interest rates and terms.
- One of the biggest downsides is that mortgage companies tend to charge fees for their work. You end up paying for these fees depending on the value of the loan.
- Sometimes, a mortgage company- especially one that is not very established yet- may not find you the best rates and terms. Sometimes, they ever guide you in the direction of a higher loan amount in order to earn higher fees.
Should I Choose a Traditional Bank or Mortgage Company?
As you can see, both have their upsides and downsides, so there really is no way to say one is always better than the other. Instead, choosing between a traditional bank or mortgage company really depends on the individual and his or her situation. And, more often than not, an individual will not know for sure whether to choose a traditional bank or mortgage company until he or she try them both out. For the best results when mortgage shopping, follow these mortgage tips:
Mortgage Shopping Tips
1. Shop Mortgage Lenders
Absolutely do not take the first offer. If you speak to someone who gives you preapproval for a loan with low interest and good terms, great! Still, do not sign on the dotted line yet. It may sound good, but that does not mean it is the best.
You should take the time to shop mortgage lenders. This means that you do not have to choose between a traditional bank or mortgage company before you know what they offer. Talk to multiple lenders of various types. Figure out what each can offer you and choose the best option from there. You can start looking here on Loanry. Fill out the form below to get offers:
2. Apply Within a Time Limit
Every time you apply for credit, it puts a negative hit on your credit. While you cannot prevent every hit, you can minimize the damage. Most often, when you apply for credit within the same industry, such as for a mortgage loan, you should do all of your applications within a two week period. If you do, all of those hits will only count against you once on your credit. This means that comparison shopping to choose between a traditional bank or mortgage company will not affect you too negatively.
3. Check Your Credit
Some places can get you a preapproval without running your actual credit. They still have to do a hard check when they are finalizing the loan application, but not necessarily when they are simply preapproving you. By checking your own credit score ahead of time, you can give the traditional bank or mortgage company something to work with.
As an additional point on your credit score, it is important to know that while companies like Credit Karma can give you a good idea of your score, the score of a traditional bank or mortgage company will pull will actually be 10 – 15 points under what you see. This is simply because it is factored differently when you are applying for actual credit as opposed to just checking your score. It is nothing to worry about.
When you talk to a traditional bank or mortgage company, they are aware of this difference. Therefore, if you say, “I checked my credit score on Credit Karma and it’s a 650,” they already know to factor in a smaller score. If you get a preapproval, it should be based on the score they expect to pull, not what you see.
You should aim to get a preapproval prior to house hunting, too. With a preapproval in hand, you know how much house you can look for and it is much easier to negotiate with sellers when they know you are serious about purchasing.
It is important to note, though, that just because the bank says you can borrow a certain amount does not mean you have to borrow the full amount. Instead, you need to determine how much house payment you can afford to pay each month.
4. Optimize Your Financial Situation
It really does not matter whether you are considering a traditional bank or mortgage company. The bottom line is that the better your financial state, the better options you will have. Here are some of the areas to pay special attention to:
There are many types of mortgages available. Some require a near-perfect credit score and some work with scores well below others. As far as the credit score itself goes, there really is no cut-off. Because some of your other financial factors can help you be approved for different loan types. Even those with terrible credit may get approved for certain loans, like USDA loans, if you meet the other requirements.
However, your credit score does have the propensity to affect the interest rates and terms of your loan. A credit score of only a few points can mean the difference in thousands of dollars in interest. Your credit score will often play the biggest role in determining whether you should choose a traditional bank or mortgage company as it can determine what loan you can get and the terms that go along with that loan.
What does your payment history look like? Does your credit show that you have paid your debts well? Do you have any collections? If so, there may be a little work you need to do to make things easier for yourself.
Pay Off Some Debts
Paying off even one or two debts can bring your score up 20 points or more. When choosing which ones to pay, though, consider this: The longer a debt has been on your credit, the less weight it carries. Usually, debts have the largest impact on your credit score in the first two years that they show up on your credit.
So when choosing which debts to focus on, choose the ones that have been there the least amount of time. And, before you pay the full amount, call the creditor to see if you can get a settlement. The difference in settling a debt for a lower amount and paying it in full is only about two points. If you can get a settlement, you will be saving yourself money and improving your credit.
— Loanry.com | Loan Shop ? (@LoanryStore) December 30, 2019
Whether applying with a traditional bank or mortgage company, your debt-to-income ratio can impact your chances. The desired DTI can vary according to the lender, but the lower your debt, the better off you are. Is there anything you can pay off quickly or easily?
You might seriously consider getting a personal installment loan to consolidate your debt. This can help you decrease debt, decrease the interest you pay, and decrease your credit utilization- all of which can have a large positive impact on your credit. Additionally, when you owe less each month to other things, it can make it much easier to pay your monthly mortgage payment.
Factors to Consider When Choosing Traditional Bank or Mortgage Company
There are so many mortgage loans along with different options. Pay attention to each of these factors that I will represent to you. They can all affect your overall mortgage approval and process. You might also consider speaking to a financial advisor prior to applying. As they are on the outside and not affected by whether or not you buy a home, they can take an objective look at your credit, your financial situation, and your financial goals. They can advise you on how much would be safe for you to borrow so you are not easily swayed if you are offered more by a lender.
Again, it is hard to decide between a traditional bank or mortgage company when you do not know what they are offering. Once you have your offers in hand, there are a few things to consider when choosing your lender:
Sometimes, you might get offered a very similar interest rate, such as 2.5 percent from one lender, 2.7 percent from another, and 3 percent from another. These are all close to one another, but they can each add on hundreds or even thousands in interest, depending on your mortgage amount. You must actually calculate what each rate will cost you over the life of the loan.
It is important to note, though, that the lowest interest rate does not necessarily mean it is the best loan. The interest is only a part of the equation- albeit a very important part. Calculate the interest, but do not make your decision based solely on it.
Different lenders may offer you a different amount of time to pay the loan. While 30 years may seem better because the monthly payments tend to be smaller, you usually end up paying a lot more over that 30 year term thanks to interest. Sometimes, a 15-year mortgage term is better. Even if the monthly payments are a little higher, you usually end up saving a ton over the mortgage term.
As we discussed above, you are facing fees. There will always be fees with a traditional bank mortgage, and there are usually fees with a mortgage company. Compare the fees you will be charged as they may mean a difference of hundreds or thousands of dollars.
How stringent is each approval process? Traditional banks are usually more stringent, but you will never know until you ask. Give each a call and determine what all will be included. While it may not always be the case, sometimes extra fees are added depending on the approval process. Be sure you check it out before jumping into anything.
While you are calling the traditional bank or mortgage company, ask them what credit factors they require? You might save yourself a lot of time because this can help you decide where to apply or even if you should wait a little longer until your credit is better.
The monthly payment is a big deal- if you cannot afford your monthly payment, you may end up without the home you are working so hard for. Understand the monthly payment of each option before deciding.
Buying your home is one of the most important financial moves you will ever make. If you want to make all the process easier than maybe a mortgage broker can help you. You need to proceed cautiously so that you can make the best decision for you and your family. No matter what type of lender you choose, the most important factor is making sure that you consider all of your options and only make a decision when you feel comfortable.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.