Planning to purchase your new home and cherish these special moments? A very common that comes to your mind: Mortgage Brokers vs Banks- Who Should You Choose? If you have to finance your home purchase, does it give you the feeling of excitement or anxiety? Because then you start searching internet for the popular lenders, low interest rates, and other real estate jargons.
And then, you come across two types of lenders- banks and mortgage brokers. So, let’s try to understand what mortgage brokers are and what is the difference between mortgage brokers and banks.
Who is a Mortgage Broker? Meaning
A mortgage broker is the middleman (it can be a person or a company) who brings mortgage lenders and mortgage borrowers together. The brokers just help you get your mortgage application prepared, attach all required documents and issue a pre-approval so that the lender can approve it fast and easily.
A broker does not use their own funds for lending, they just connect the borrower with the lender according to their (borrower’s) financial needs, the time period, mortgage amount, interest rates, etc.
Mortgage brokers earn commission from either the lender (most of the times), the borrower, or both in some cases. These commissions are generally to be paid after the application is approved by the lender.
The commission always depends on factors like size of the loan, duration of the loan etc. But the little commission helps borrowers to save time and effort in the whole mortgage application process. Mortgage brokers generally work with several lenders and that is why they are able to provide you various options when you go to them.
What they demand from the borrower is information regarding his income, assets, credit report etc. so that they can access his ability to repay. This information is then passed to the lender along with the mortgage application for the final approval.
Note: Generally, “mortgage broker” is a common term used in countries like United States and Canada. You may not hear it much in India.
Mortgage Brokers vs Banks: What’s the difference?
The main difference between mortgage brokers and banks is that banks can only offer the products their institution has, while mortgage brokers can offer you multiple products as they work with multiple lenders.
Mortgage brokers who are independent work after obtaining a license. As they acquire high volumes of mortgage products, they easily negotiate for lower rates from the lenders.
And the good thing is they can pass these volume discounts directly to you. Now that’s something really exciting! But if you go directly to the bank, they will not give you any discount.
Still the majority of people use banks for mortgages but the use of mortgage brokers is growing at a good pace especially in developed countries like US and Canada. In fact, the role of these intermediaries and their importance can’t be denied with the growing need for independent or expert advice.
You may also like to know about different Financial Intermediaries: Meaning, Types & Importance
Mortgage Brokers vs. Banks: Difference
For more clarity, the table below present the differences between a bank and a mortgage broker:
|Meaning||Mortgage specialists who are licensed and have access to multiple lenders and mortgage rates.||Financial institution who accepts deposits and provide loans generally regulated by central bank or national government.|
|Lender||No, they are only intermediary.||Yes, they are the lenders.|
|Assessing your documents and payslips||They pre-approve all the documents but the final approval is in the hands of lender only.||They finally approve the documents and issue mortgage.|
|Specialization||They know the mortgage process as they are experts in their area.||Since they offer variety of services, they do not have that much mortgage expertise.|
|Home loan options||They have a variety of products and interest rates.||Limited products available as they can only offer their own products.|
|Convenience||With the help of technology, you can apply and submit the documents online without visiting the broker.||While they do also have online options, still many of them require you to visit the branch for submitting documents.|
|Interest rates||They review your mortgage throughout mortgage life to ensure you are getting competitive rates.||They are not obliged to ensure competetive interest rates.|
|Point of contact||They work towards your best interest.||They are working towards the bank’s interest.|
How Mortgage Brokers Finance Mortgages?
So, now you must have a fair idea about: Who is a mortgage broker? What they do, and how they are different from the banks? Let us now look at the process of what mortgage brokers do from the moment you reach out to them till you get your mortgage approved.
Mortgage Process: Steps to Know
- The broker first establishes the relationship with the borrower and explains every information to you. This includes services to be provided to you, their role in the complete transaction, the fees he will charge, when and how he will be compensated, what all details you need to provide him, and other key aspects.
- A mortgage broker then obtains information about your finances and determine the right type of product to you.
- Then they provide various appropriate options to you according to your finances, your amount, time period, risks involved etc.
- The broker will further explain his rationale for why he is suggesting you those particular options and assist you to understand nature, costs and risks involved in each option.
- The final call is always yours and you then choose the most suitable option.
- He may also be with you to sign written acknowledgement about the risks associated with the chosen option.
- The broker completes all the paperwork and then submits your documents and application to the lender for final approval.
- He then reviews the rate, terms and conditions of the mortgage contract and negotiates with the lender.
- Then he again provides you with all the necessary information so that you make an informed decision. A good mortgage broker will provide you with disclosures which will include all terms and conditions like total cost of borrowing, interest rates, fees, paying period, risks of mortgage, his role as broker and conflict of interests.
- After the complete process, your mortgage application is approved by the lender.
- After the final approval also, your broker will maintain proper documentation related to every transaction and help you get competitive rates.
Banks vs. Mortgage Brokers: Which is Best?
So, availing a home mortgage isn’t that stressful, when you have mortgage brokers who will save your time and hassle of documentation, and present you the best interest rates.
In addition, mortgage brokers also offer you multiple products and are expert in their fields. Therefore, consulting a mortgage broker is a good way to get you your home without any hassle of shopping around a mortgage. Don’t you think so?
People are coming out of the traditional banking system and exploring new and easy opportunities for home financing. What are your thoughts on the same? Mortgage Brokers vs. Banks: Which is Best? Do discuss in the comments.