Pros and Cons of Using a Big Bank for a Mortgage
The pros of using a big bank for your mortgage include competitive loan terms, potential discounts and proprietary mortgage programs. The cons of using a big bank for your mortgage are that they are big so your mortgage business is not very important to them, they apply tougher mortgage qualification requirements and borrowers are subject to cross-selling of various financial products.
Borrowers should understand the positives and negatives of using a big bank for their mortgage and shop multiple types of lenders to find the lender that is right for them.
Pros of Using a Big Bank for Your Mortgage
Low Mortgage Rates
Because of their size and financial resources, big banks may offer lower mortgage rates than other types of lenders. Paying a lower rate reduces your monthly payment and saves you money on total interest expense over the life of your loan. In some cases a big bank may use competitive loan terms to attract new customers that they can sell additional banking products to. You can potentially take advantage of these offers to lock-in a low rate on your mortgage. If you already have a relationship with a big bank you should inquire about special offers for existing customers.
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Potential Discounts
Many big banks offer discounted interest rates or fees for existing customers. In most cases, borrowers are required to have a significant amount of money deposited at the bank to qualify for a discount. In some cases existing customers are required to open a new account, such as a brokerage account, to receive the discount. The amount of the discount usually varies depending on the amount of funds you have deposited at the bank with the greater the funds, the higher the discount. Some banks offer interest rate discounts of 1.000% or more for borrowers who deposit a significant amount of funds. When shopping for a mortgage, borrowers should ask their existing bank as well as other potential lenders, about any interest rate or closing cost discounts they offer.
Proprietary Mortgage Programs
Some big banks develop mortgage programs that are only available through them. These programs may focus on low down payment borrowers or address unusual borrower circumstances. These proprietary mortgage programs are usually similar to other mortgage programs but address a specific borrower niche or need. For example, a bank may offer a 3% down payment mortgage program but permit a lower credit score or alternate income sources. Borrowers with unique circumstances may find a big bank mortgage program that meets their financing needs.
Direct Lender
Big banks are direct lenders which means they do not rely on a third party to fund their mortgages. Most big banks use checking and savings deposits from their customers as the source of capital for their mortgage lending. Being a direct lender provides big banks more control over the mortgage lending process and enables them to offer highly competitive mortgage terms. While big banks usually have more strict borrower qualification requirements, being a direct lender does given them some discretion on the types of mortgages they offer. For example, a bank may offer more lenient qualification requirements or more aggressive mortgage terms and decide to keep the loan on their books, which is called a portfolio loan. Bigger banks with more resources are better positioned to offer portfolio loans which can benefit mortgage borrowers.
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Cons of Using a Big Bank for Your Mortgage
Your Mortgage Business Does Not Really Matter
They are called "big" banks for a reason. Big banks are multi-billion dollar financial institutions so your mortgage alone does not have a significant impact on the bank's bottom line. Additionally, most loan officers at banks earn a regular salary in addition to commissions which makes them less motivated to compete for your mortgage business or fight to get your loan approved. This also means that big banks tend to be less flexible and less willing to accommodate marginal borrowers and more focused on prime borrowers who they can cross-sell multiple products to. Although many borrowers who get mortgages through a big bank have positive experiences, the overall level of customer service provided by big banks can be poor as compared to other types of lenders.
Tougher Mortgage Qualification Requirements
Big banks tend to have more strict borrower qualification requirements as compared to other types of lenders. For example, big banks may require a higher credit score or use a lower debt-to-income ratio for their lender underwriting process. Additionally, big banks are usually less willing to make exceptions or show flexibility to help borrowers qualify for a mortgage -- either you meet the bank's guidelines or you do not. This is why it is important to for borrowers to contact multiple types of lenders when shopping for a mortgage. Just because one lender, such as a big bank, declines your mortgage application does not mean that all lenders will reject you. Mortgage qualification requirements vary by lender so while a big bank may apply strict qualification requirements a credit union or mortgage broker may use more flexible qualification guidelines and approve your loan.
Limited Mortgage Program Offering
Some banks may not offer a full range of mortgage programs. For example, a big bank may not offer a specific no or low down payment mortgage program or a home renovation program such as the FHA 203(k) program. Additionally, not all big banks offer reverse mortgages, construction loans or asset depletion loans. Big banks tend to focus on more standard mortgage programs so if you are seeking a unique or specialized loan program you may need to contact different types of lenders.
Cross Selling
If you select a big bank for your mortgage be prepared for cross selling of other bank products such as deposit accounts and credit cards. Banks are always trying to maximize revenue from their customers and one of the best ways to do that is to sell you multiple products. In some cases using multiple bank products can work to your advantage because you can receive discounted mortgage terms, but borrowers are not required to purchase multiple products from their mortgage lender and you are not required to use your existing bank for your mortgage. Borrowers should select the lender that offers the best mortgage terms regardless of the other products promoted by the lender.
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Sources
“Where can I get a mortgage?” CFPB. Consumer Financial Protection Bureau, February 24 2017. Web.