Understanding the 3 Main Mortgage Lending Options Available to You

When looking for a home loan, there are generally three options at your disposal.

  • Commercial banks
  • Dedicated mortgage banks and loan officers
  • Mortgage brokers

The problem is that many people confuse the different types of mortgage lenders, or otherwise assume they're all the same. Understanding the differences can help you make a far more informed choice.

1. Using a Commercial Bank for Your Mortgage Loan

A commercial, or retail, bank is typically one of the first places that come to mind when people consider mortgage loans. They're the most prevalent type of bank, and most well-known among people. You can also include credit unions in this category as well.

These banks are often called direct lenders because you can literally walk into one and start the loan process face-to-face with an agent. The upside to these banks is that they're competitive with other banks, so it's possible to receive deals, special pricing, or other promotions at any given time.

The downside is that they tend to have strict underwriting guidelines. That means there's rarely room for negotiation. Either you're approved, or you're not.

2. Using a Mortgage Bank for Your Mortgage Loan

Mortgage banks work similar to commercial banks in that they typically do their own underwriting. However, they take the risk of your loan on themselves. They will either keep your loan and service it, or sell it to another bank (usually a retail one).

Mortgage banks can exist as offshoots of commercial banks, or they can operate independently. Since they're typically not retail banks, they can offer more flexibility in their loan terms.

The independent mortgage banks often work with multiple banks, so they can offer you the best lending options that their affiliates have available. They pay the loan themselves, so it's possible the mortgage bank will remain as your primary contact for the duration of your loan.

3. Using a Mortgage Broker for Your Mortgage Loan

Mortgage brokers are kind of the opposite of mortgage banks. They are intermediaries, as they do not lend out the money themselves. However, they work with a variety of lenders.

To put that in perspective, banks do the lending themselves, from their own funds. So there isn't much "shopping around" they can do. Mortgage banks also do the lending themselves, and while they may work with some other entities, it's usually a short list of commercial banks.

By contrast, a mortgage broker can deal with a large pool of lenders, not just banks, but private lenders as well. They can mix and match options between different services. That means they are really the most flexible option available. Brokers also do the heavy lifting with the lenders as far as negotiation and paperwork. If your interested in this option, consider contacting local brokers, such as McKinley Mortgage, to discuss your situation and what will work best for you.

In the end though, you should look at what's available and chose the option that works best for you. While a mortgage broker can find you the deal of a lifetime, it's possible your local credit union has a special running with a low fixed rate. Always keep your options open.

If you want a good overview of rates across the board, you should speak with a broker first to see what they have to offer. From there you can start to look around at the other options and compare.