Mortgage Brokers VS Banks: Which Is A Better Option For You?
You should never discount what your local bank or mortgage broker can do for you the next time you are ready to finance a great deal. Although traditional financing has obtained a bad name recently, it remains a good option for some borrowers. Your two primary options are mortgage brokers and local banks. Each of these financial institutions perform basically the same functions, but they differ in the way the go about doing it. Brokers have access to a number of lenders, but local banks are governed by programs and guidelines of the bank itself. Pros and cons exist with either of these based on debt to income ratio, availability of down payment, and credit profile of the buyer. It can be tricky determining with which one to work. Following are some pros and cons that should help with the decision.
Mortgage Brokers VS Banks Which Is A Better Option For You?
Local Bank
Most people turn first to their local bank when they want to secure a loan. Common sense dictates that one should give the institution they have already trusted to take care of their accounts the opportunity to help. It is also important to understand the benefits they offer. However, before reaching out for financing of any type, one should also know the strength of the application. Obtaining a copy of your credit report should be sufficient because it will contain not only your score but also show any liabilities that exist.
To determine your debt to income ratio, take your minimum monthly payments for all your liabilities and divide that by your gross monthly income. Debt to income ratio is very important when applying for a loan. Local banks have an advantage over mortgage brokers in that they cater to borrowers with low debt to income ratios, significant down payments and strong credit scores. Existing account holders can add this as another favorable factor toward getting approval. Those with excellent credit profiles may even be able to obtain lower interest rates, as much as half a point lower.
Local banks can falter though when any type of out of the box application is involved because of stricter guidelines and underwriting rules. That means they have less margin for errors or any capability for making exceptions. Borrowers who fall short of perfect in any area of the application will find it rejected. Length of transaction also carries potential for failure. Many local banks do not do in house underwriting, but if you find one that does it can expedite the entire process. Nonetheless, most loans are shipped off and this is where take your chances with underwriting guidelines. With all the red tape involved with getting a loan, it isn’t uncommon for the process to be stretched out over several weeks time. This is why local banks are best at serving borrowers who are willing to wait and know exactly where they stand financially.
Mortgage Brokers
At the time of the market crash, fingers were directly pointed at mortgage lenders. As with all professions, there were some bad apples mixed among the many good brokers. Since then the industry have gone through major changes in the last decade. One of the most significant has been with license requirements. Now brokers must pass local as well as national exams and they must participate in annual continuing education. Today you can have confidence that mortgage brokers really do know what they are doing when you work with them.
Another major change that took place has to do with the way fees and disclosed and charged. Brokers now have a cap on the amount they can earn and you must be presented with a fee sheet before you get into the process too far. If at any time the stated fees change more than a few percentage points, your loan must be re-disclosed and a three day waiting period for closing is mandatory. Because these changes protect the borrower, we have seen a revitalization of the industry.
Mortgage brokers are able to work with numerous lenders at one time, and this is the number one benefit they offer. It isn’t uncommon for mortgage brokers to work with several dozen banks during any give period with each lender offering different advantages that appeal to the borrower. For instance, some allow loans to self-employed individuals who have been in business less than two years while others may lend more to those with rental income.
The lenders they work with can stretch the guidelines in ways that local banks cannot. For this reason, borrowers with dings to their credit may stand a chance of being approved. Brokers also work with lenders on a wholesale level which gives them access to more favorable interest rates than might be found in the local market. Additionally, they have the option of offering interest rate credits that reduce the bottom line requirements for closing.
The most negative aspect of mortgage brokers is that they work on the concept that they can close every deal. For the borrower, this can mean missing out on the property or risking loss of the deposit. Every loan scenario is different. What might work for one borrower might not do the same for someone else. Some overzealous mortgage brokers think they cannot fail. This carries the potential for you ending up paying for their eagerness when a deal does not work out.
There is a misconception that each time your credit report is pulled your score will drop. This is not true and in fact it is expected that people will shop around before deciding on a lender. The only way to get the best financing for you is to ask lots of questions and understand everything you can before starting the process.