Should You Get A Mortgage From A Bank Or A Mortgage Broker?

Introduction

In this tutorial, we will explore the differences between obtaining a mortgage from a bank or a mortgage broker. Understanding these differences can help you make an informed decision when financing your home. We will cover the types of mortgages available, how securitization works, and the implications of conforming versus portfolio loans.

Step 1: Understand Types of Mortgages

Familiarize yourself with the common types of mortgages:

• Conforming Mortgages: These include loans backed by Fannie Mae (FNMA), FHA (Federal Housing Administration), and VA (Veterans Administration). They must adhere to specific guidelines for approval.
• Portfolio Loans: These loans do not conform to standard guidelines and are kept by the lender (banks/credit unions) in their portfolio. They can set their own lending criteria.

Practical Advice

• Choose conforming loans for predictability and ease of resale.
• Consider portfolio loans for unique situations where you may not meet standard guidelines.

Step 2: Know the Securitization Process

Securitization is the process of bundling together conforming loans to sell them as blocks to investors. This process involves:

• Ensuring loans conform to strict guidelines for resale.
• Banks and mortgage companies typically sell these loans shortly after closing.

Practical Advice

• Be aware that if you choose a conforming loan, it may change hands quickly, impacting your loan servicer.

Step 3: Evaluate the Role of Mortgage Companies

Mortgage companies usually do not keep loans in their portfolio. Instead, they:

• Have investors lined up to purchase conforming loans immediately after closing.
• Focus on providing a streamlined process for borrowers.

Common Pitfalls

• Do not expect mortgage companies to service your loan; they typically sell it right away.

Step 4: Consider Small Loans from Credit Unions

For smaller loans (e.g., a $50,000 mortgage for a $200,000 house), credit unions can be advantageous. Benefits include:

• Potentially lower closing costs and no need for appraisals.
• More flexible terms tailored to your needs.

Practical Advice

• Approach your credit union for small loans and negotiate terms as if it were a car loan, ensuring no unnecessary fees or costs.

Step 5: Understand the Risks and Regulations

Post-2008 housing market crash, regulations have tightened around mortgage lending. Key points include:

• Stricter guidelines for appraisals and underwriting processes.
• Increased scrutiny to avoid inflated property values and risky lending practices.

Practical Advice

• Always ensure your lender follows reputable lending practices and adheres to conforming guidelines to minimize risks.

Conclusion

Choosing between a bank and a mortgage broker involves understanding the types of loans available, the securitization process, and the benefits of working with credit unions for smaller loans. By being informed about these aspects, you can make a smarter decision that best fits your financial situation. Consider your options carefully and don’t hesitate to negotiate terms that work for you.