Banks, Brokers, and Credit Unions … Oh, My!

An Introduction to the Basic Types of Mortgage Companies

By Rae Oakley, Flyhomes Mortgage

So you want to buy a home and you need a mortgage. Let’s say this is your first go-round, and you don’t have any relationships established with mortgage companies, so you ask your parents, and they recommend you check out a local mortgage broker.

Then your friends say you should work with a big bank and your realtor refers you to a credit union. 

What are all these types of mortgage companies, and how do you know who to work with?

Well, before you rule anyone out, here are some things to consider about the different types of financial institutions behind the (likely) biggest purchase you’ll ever make.

Mortgage Brokers

A mortgage broker is a middleman between you and a lender. To clarify, a lender is an institution that provides the cash to fund your purchase. While you might be inclined to “cut out the middleman,” working with a broker can have its benefits. 

The main benefit is variety. Mortgage brokers typically partner with a number of lenders, so your broker has access to more loan products than a direct lender. Since your broker can help you find the product that works best for you, you’ll ultimately walk away from the experience with a higher level of personalized service. Because brokers can shop multiple lenders at once, you save time comparing your options and you’ll likely get a lower interest rate. 

You might be wondering: how do mortgage brokers make money? Brokers have access to wholesale rates, so they either earn about a 1-2% commission from their partner lender on each loan they broker, or they might charge this commission directly to you, the borrower. 

Be sure to identify the costs quoted by your broker, as some mortgage brokers wrap costs into your loan. Know what to look for and be sure to read your disclosures and ask questions if you are unsure of a specific charge that is required to close your loan. 

Direct Lenders

A direct lender is typically either a bank, a mortgage bank, or a non-bank lender like an online mortgage company. A direct lender will employ a set of mortgage loan officers who are trained to originate your loan. 

Direct lenders are limited to offering only the loan products associated with their company … that’s how they make money.

Despite the smaller range of product choices, working directly with your lender can save you time and energy in originating and closing on your loan. Since there is no go-between, the potential for errors is reduced and any issues that pop up can usually be resolved quickly. 

Direct lenders and credit unions both offer more than just mortgages, so starting a relationship with one of them may also make your life a bit easier down the line when you need a credit card or personal loan.

Credit Unions

Because credit unions are not-for-profit, member-centric co-ops, they have a different incentive structure for how they make money than a bank does. A bank’s duty is to increase profitability for its shareholders, but credit unions are inclined to focus on their members … which can mean lower fees than their competitors. 

Credit unions are also more likely to retain the servicing rights to your loan, which reduces complexity in your mortgage payments. 

Lastly, similar to mortgage brokers, credit unions typically have a local outpost and can more readily offer face to face interactions when compared to larger banks.

While one type of institution isn’t necessarily better than the others, we hope you feel empowered to choose what’s best for you now that you’re more familiar with the mortgage players. 

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