Planning to buy a house?
Welcome to the American Dream! Although you might no longer believe in this dream of our forefathers, there’s no doubt buying a home is a big step and a source of pride.
However, the median price of a home in the U.S. is about $250,000. If you’re anything like most Americans, you don’t have this kind of money. The only way to afford a home is to take out a mortgage. But then, should you borrow from a bank or a mortgage company?
This bank vs mortgage company guide will provide you with the information you need to make a smart choice.
Bank vs Mortgage Company: Definitions
You certainly know what a bank is. This is a commercial institution that offers a wide range of financial products and services, including deposit accounts, credit cards, and loans such as personal loans and mortgages. Banks are regulated by the Federal Reserve System.
On the other hand, a mortgage company is a financial institution that specializes in making home loans. You can’t find a mortgage company offering deposit or saving accounts, or any other type of loan for that matter. They are specifically in the business of mortgages.
The Pros and Cons of Getting a Mortgage from a Bank
Banks make the vast majority of mortgages, and it’s easy to see why. Since they’ve been around for so long, it’s easier for borrowers to trust them. When you visit your local bank to take out a loan or deposit money, you don’t even for a second think you’ll lose your money. In fact, there are people who don’t know that mortgage companies exist.
This brings us to the first advantage of getting a mortgage from a bank: trust.
When your mortgage is approved by your bank, you know that it will keep its end of the deal, which is to disburse the funds to the seller of the house. In fact, after a bank has given you a mortgage pre-approval, you stand a pretty good chance of getting the mortgage approval, unless there’s a drastic change in your financial situation, such as a job loss.
Two, there’s the matter of interest rate.
When you’re shopping for a mortgage, your goal is to secure the lowest interest possible. You’re more likely to get the lowest rate at a bank.
Third, banks tend to be more lenient when it comes to foreclosures. Typically, defaulting on three consecutive mortgage payments means you’re inviting the lender to initiate foreclosure proceedings. However, a bank is more likely to listen to your case and give you enough time to get your act together and bring your account to good standing.
Also, banks offer a wide range of home loans, from traditional mortgages to FDA, VA, and USDA loans. There also other types of custom loans, such as the stated income mortgage loans designed for business owners.
What are the disadvantages of taking out a mortgage from a bank?
Banks have strict approval requirements. If your credit score doesn’t measure up or your income is shaky, you have no chance. The bank will turn down your application.
Another disadvantage of dealing with a bank is you have to make do with the lengthy mortgage application review process. It can take several weeks before your application is reviewed and a decision rendered. This can be frustrating, especially when there’s a house you want to snap up before another person does.
Also, considering that there are thousands of banks, it can be difficult to choose the right bank for your needs.
The Pros and Cons of Taking Out a Mortgage from a Mortgage Company
Mortgage companies know they are in a tough industry where banks dominate. To give banks a run for their money (literally), they need to work thrice as hard. This is why mortgage companies have better customer services.
If you want a mortgage lender that values you as a customer, look no further than a mortgage company.
What’s more, these companies are more lenient when it comes to approval requirements. It’s not uncommon for borrowers who have been turned down by banks to secure mortgages from mortgage companies.
This isn’t to say mortgage companies approve just about every application. No, we’re are saying they’re more likely to look beyond your credit score. If you’ve got bad credit but excellent income, for instance, you could get approved.
Mortgage companies don’t take forever to review loan applications. You’ll get feedback in a matter of a couple of working days.
Mortgage companies typically charge a higher interest rate on their mortgage facilities. This is to compensate for their lax approval requirements. If a lender is going to overlook your bad credit, expect them to slap you with a higher interest rate.
Also, these companies tend to have tight borrowing limits. Whereas you can get a million-dollar mortgage from a bank, a mortgage company will likely limit you to $500,000. So, if you’re looking to buy a million-dollar home, you might have no choice but to approach a bank.
Lastly, mortgage companies can be pretty aggressive when you’ve defaulted on your loan. Since they aren’t operating on large margins like banks do, they rely on borrowers to stay on top of their monthly payments. If you default, expect your house to be foreclosed upon so fast.
Bank vs Mortgage Company: Which Way to Go?
If there’s any takeaway from this bank vs mortgage company guide, it’s this: banks might be most people’s preference, but mortgage companies are rising fast. Both options have their pros and cons, but it might come down to your personal situation.
Either way, you now have the information to make a choice.
All the best and keep reading our blog for more helpful articles.