Pros and Cons of Using a Mortgage Bank
Because most mortgage banks do not take deposits or have numerous branches they are sometimes called "non-bank" lenders. Mortgage banks range in size from single state to multi-state and even national operations. Because most mortgage banks have a limited retail presence many borrowers have not seen or heard of them but they are a growing presence in the mortgage industry. Examples of mortgage banks include Quicken Loans, AimLoan and PennyMac.
The positives of using a mortgage bank are that they focus exclusively on mortgages, they are direct lenders and some offer highly competitive loan terms. The negatives of using a mortgage bank are that some charge higher interest rates, their mortgage program offerings may be limited, they apply relatively strict qualification guidelines and may have limited financial resources compared to big banks.
Borrowers should understand the pros and cons of using a mortgage bank and shop multiple types of lenders to find the lender and loan that best meets their personal and financial objectives.
Pros of Using a Mortgage Bank
Focus on Mortgages
Unlike other types of lenders such as big banks and credit unions, mortgages are usually the only product offered by mortgage banks. Big banks and credit unions usually offer other personal finance products such as deposit accounts and credit cards. Focusing solely on mortgages enables mortgage banks to develop extensive expertise when it comes to processing and closing loans. Loan officers at mortgage banks may be more familiar with the loan process and mortgage regulations than loan officers at other types of lenders. Mortgage banks are also totally focused on processing and closing your mortgage because that is how they make money. Big banks and credit unions may also engage in cross-selling multiple personal finance products in addition to processing your mortgage. Finally, focusing exclusively on mortgages enables mortgage banks to streamline their cost structure and potentially offer more attractive mortgage terms.
May Offer Competitive Mortgage Terms
The exclusive focus on mortgages, lean cost structure and direct lender capabilities enables some mortgage banks to offer highly competitive loan terms such as lower interest rates and fees. In some cases, mortgage banks can offer loan terms that match or beat the terms offered by big banks or credit unions. Lower mortgage fees saves you money upfront while a lower mortgage rate saves you money on your monthly payment and over the life of your mortgage. The opportunity to save money on your mortgage means that borrowers should include at least one mortgage bank in addition to other types of lenders when shopping for a mortgage.
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Limited Retail Presence Means Lean Cost Structure
Unlike big banks most mortgage banks have few retail locations, which reduces their cost structure. Many mortgage banks are licensed and operate in states where they have no retail presence. Instead of walking into a bank branch to complete a loan application, much of the mortgage process with a mortgage bank is conducted online, via email and over the phone. It may seem like banks such as Wells Fargo, Bank of America, Citibank and Chase have a branch every other block while you have probably never seen a retail location for most mortgage banks. Utilizing technology instead of physical locations enables mortgage banks to operate more cost-effectively which can translate into better loan terms for borrowers.
Direct Lender
Most mortgage banks are direct lenders as compared to mortgage brokers that rely on funding, or wholesale, lenders to fund their mortgages. Most mortgage banks use financing from third parties such as a bank line or other types of debt as the source of capital for their mortgage lending. Being a direct lender provides mortgage banks more control over the funding process and potentially enables them to offer more competitive terms than indirect lenders or mortgage brokers.
Cons of Using a Mortgage Bank
Mortgage Terms Vary
While some mortgage banks offer highly competitive loan terms others offer higher interest rates and fees. Loan terms can vary significantly across lenders and some mortgage banks compete on the basis of customer service and brand as opposed to price which means borrowers pay a higher mortgage rate. For example, some mortgage banks promote their technology platform, ease of use or customer support instead advertising their interest rates. When shopping for a mortgage borrowers should decide the factors that are most important to them -- interest rate, customer service, etc. -- although you should not have to pay a higher interest rate to receive a high quality mortgage experience.
Mortgage Program Offerings May Be Limited
Some mortgage banks may not offer a full range of mortgage programs. For example, a mortgage bank may not offer a specific no or low down payment mortgage program such as the HomeReady Program or an energy efficient mortgage program such as the HomeStyle Energy Program. Additionally, not all mortgage banks offer reverse mortgages, home improvement loans or home equity loans. Mortgage banks tend to focus on more standard mortgage programs and prefer borrowers with straightforward credit, financial and employment profiles. Borrowers with more unique circumstances may be better served to work with a different type of lender, such as a mortgage broker, that offers a wider range of mortgage programs.
May Not Service Your Mortgage
In most cases mortgage banks sell your loan to a third party after your mortgage closes which means that they may not service your mortgage. For example, you may make your monthly payment to your mortgage servicer instead of the lender that funded your loan. Additionally, if you have a question about your loan terms, monthly payment or mortgage balance after your loan closes you contact your mortgage servicer and not the mortgage bank. In some cases mortgage banks sell your loan but keep the servicing which means that you continue your relationship with the mortgage bank. In other cases the mortgage bank sells both the loan and the servicing which means your primary mortgage relationship transfers to another company.
May Have Limited Financial Resources
Although most mortgage banks promote themselves as direct lenders they usually rely on a third parties such as banks or investors for the funding to provide mortgages. Mortgage banks usually also have less financial resources than larger banks or credit unions. Having relatively limited financial resources typically does not restrict mortgage banks but there may be other lenders that are more competitive due to their greater financial capacity or because they have multiples ways of generating revenue from borrowers. For example, some lenders with more resources can apply more lenient borrower qualification standards because they can keep mortgages on their books, which are also called portfolio loans. Mortgage banks' relatively limited financial resources restricts their ability to offer portfolio loans. Additionally, lenders with more financial resources may also be more more active in turbulent markets when interest rates can change significantly.
Stricter Borrower Qualification Requirements
Although most mortgage banks advertise themselves as direct lenders they usually do not keep your mortgage on their books and instead sell your loan to a third party. While selling your loan gives mortgage banks more capital to offer more mortgages it means that they have less discretion over the mortgage qualification process as compared to other direct lenders such as big banks and credit unions that may keep your mortgage on their books (portfolio loans). Mortgage banks need to make sure that the loans they generate meet the standards specified by the third parties that purchase the loans. This gives mortgage banks less flexibility in applying mortgage qualification guidelines such as credit score, debt-to-income ratio and employment history requirements. This also means that most mortgage banks tend to focus on higher quality borrowers.
No Cross-Product Discounts
Unlike big banks and credit unions, mortgage banks do not offer multiple financial products in addition to mortgages. While not being subject to cross-selling is usually a good thing, in this case it means that mortgage banks cannot offer discounted interest rates or closing costs if you use multiple banking products. For example, some big banks discount your interest rate if you deposit significant funds into a brokerage account at the bank. This is not a possibility with mortgage banks which means you may end up paying a higher interest rate or fees. You should select the mortgage that is right for you independent of other products offered by a lender but the lack of cross-product discounts could place mortgage banks at a disadvantage with some borrowers.
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Sources
“Contact multiple lenders.” CFPB. Consumer Financial Protection Bureau, 2017. Web.