Advantages (and Disadvantages): Mortgage Lenders vs. Banks

Is a mortgage lender or a bank better for your home purchase?

an approved mortgage application near a calculator on a table

Kittisak Jirasittichai / Eye Em / Getty Images

When you’re ready to finance your home purchase, you’ll likely find plenty of places to get a mortgage loan. Two of the most common are dedicated non-bank mortgage lenders, such as Quicken Loans and SoFi, and large banking institutions like JPMorgan Chase and Wells Fargo.

While both banks and mortgage lenders can help you get the funds you need to buy your home (as long as your credit, income, and debts meet their qualifications), they each come with a unique set of pros and cons. 

Broadly speaking, mortgage lenders often offer a larger variety of loan options and can be more forgiving of borrowers with damaged credit. Banks, on the other hand, typically have fewer options and stricter lending criteria.

The best fit for your purchase will depend on your unique home-buying scenario, your finances, and your goals. 

Banks: Pros & Cons

Assuming you already have a relationship with a bank, you may find it easy to reach out to a local banker to assist you with the home loan process.

Banks also often offer special benefits or discounts for existing banking customers. They may even have proprietary in-house loan options designed for specific buyer segments (such as self-employed buyers, investors, etc.).

In addition, banks may try to promote other financial products throughout the process in order to maximize revenue. This could include offering specific savings or checking accounts, credit cards or other products in exchange for more favorable mortgage terms.

The major downside of bank loans is that they often come with stricter lending standards because they’re subject to federal compliance and reporting laws. This might make it harder to come by a loan if you have less-than-stellar credit or a major financial event (like a foreclosure or bankruptcy) to your name. It also often takes longer to close on the loan.

  • Depending on your financial profile, may have lower interest rates

  • May offer special rates or benefits to existing banking customers

  • The bank will most likely continue servicing your loan after closing

  • May offer proprietary and niche-specific loan programs

  • Stricter lending standards

  • Less variety of loan products

  • Less mortgage lending expertise

  • More fees, due to increased compliance requirements

  • Cross-selling of additional banking products

  • Longer closing times

Mortgage Lenders: Pros & Cons

In the past few years, dedicated mortgage lenders have grabbed an increasingly large share of the home loan market, due to their flexibility and speed in closing loans.

Since these lenders are often less strictly regulated than banks, they are often able to customize loan recommendations to the buyer’s exact financial scenario and home-buying goals. Loan originators with mortgage companies are also required to pass several mortgage-related courses and exams, giving them a deep level of knowledge in the industry.

Some of these mortgage lenders are online-only, which means you might not get the same amount of hand-holding in terms of customer service.

Mortgage lenders also often sell their loans to servicing companies after closing. That means you won’t have control over who you ultimately pay or work with, though the rates and terms on your mortgage won’t change after the sale.

  • More lending expertise and training

  • More loan options

  • Better loan guidance and advice

  • More willing to negotiate on terms

  • Faster loan closing

  • May not have a physical location

  • The lender may sell your loan to another servicer after closing

Mortgage Lenders vs. Banks: Not Your Only Choice

Though the majority of mortgages are sold by designated mortgage lenders and banks, other options exist. There are also online lenders and financial technology firms you can consider, as well as credit unions, savings, and loan associations and smaller financial institutions.

Did You Know? Mortgage loans can come from any of these sources.

  • Mortgage lenders and mortgage companies
  • Online lenders 
  • Savings and loan associations
  • Banks
  • Credit unions
  • Stock brokerages
  • Private individuals

You can also consider seller-financing for your home purchase. With seller-financing, the home’s seller agrees to let you purchase the property over time, via monthly installments. These types of loans typically come with higher interest rates due to the bigger risk they pose to the seller.

Getting the Best Mortgage for Your Needs

Lenders, banks and other financial institutions all come with their own benefits and drawbacks. To ensure you get the best loan for your purchase, make sure to shop around first. Get quotes from several different lenders, banks and organizations, and compare the rates, fees and closing costs that would be required of each.