Mortgage Lenders vs. Banks: What's the Difference?

It's about more than just borrowing money to buy a home

Couple closing on house

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You’ll find plenty of places to get a mortgage loan when you’re ready to finance your home purchase. Two of the most common options are dedicated non-bank mortgage lenders, such as Quicken Loans and SoFi, and large banking institutions, like JPMorgan Chase and Wells Fargo. Each offers something the others don't, so your choice could depend on your priorities.

What's the Difference Between a Mortgage Lender and a Bank?

 Mortgage Lenders Banks 
Offer a variety of loan options Have fewer loan options
Have more lenient credit requirements Tend to have strict credit requirements
May sell your mortgage loan to another lender after closing You'll pay and work with the same bank throughout the life of your loan

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. But they each come with a unique set of pros and cons. 

Mortgage lenders usually offer a larger variety of loan options, and they can be more forgiving of borrowers with damaged credit. Banks typically have fewer loan options and stricter lending criteria.

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

Which Is Right for You?

You may find it easiest to simply reach out to a local banker to assist you with the home loan process if you already have a relationship with a bank. But dedicated mortgage lenders are grabbing an increasingly large share of the home loan market due to their flexibility and speed in closing loans.

Banks: Pros and Cons

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

Banks may try to promote other financial products throughout the loan 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 for you to qualify if you have less-than-perfect credit or a major financial event (like a foreclosure or bankruptcy) on your record. It also usually takes longer to close on a bank loan.

  • May have lower interest rates

  • May offer special rates or benefits to existing bank 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

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

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

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

A Best-of-Both-Worlds Option

The majority of mortgages are sold by designated mortgage lenders and banks, but other options exist that are sometimes hybrids between the two. You might consider a financial technology firm, as well as a credit union, savings and loan association, or a smaller financial institution.

Mortgage loans can come from numerous sources. They're not limited to banks and mortgage lenders. Stock brokerages and private individuals can also provide home loans.

You might also consider seller-financing for your home purchase, where 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, however.

The Bottom Line

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