Mortgage 101: Traditional banks v. mortgage banks: What’s the difference?

Mike Miles

By Mike Miles

I’m a little confused as to why I haven’t written about this topic before. It’s one of the more common questions we get from potential clients. What’s the difference between a mortgage banker (like Fountain Mortgage) and an actual bank when it comes to mortgage lending? Well, there are a handful of reasons explained below.

Overall mortgage knowledge:

Loan officers employed by mortgage banks are trained and licensed to originate mortgage loans only. Loan officers employed by banks don’t have to be licensed and aren’t specialized in mortgage loan training. Banks offer many more products than mortgage bankers such as consumer loans, credit cards, and auto loans. This causes a big difference of mortgage loan product knowledge between loan officers.

Lending guidelines:

All mortgage banks and traditional banks play by the same lending rules/guidelines set forth by Fannie Mae, Freddie Mac, FHA, USDA and VA. Both also have what’s called non-agency or portfolio loans for any loan that might fall outside of the guidelines required by the entities noted above. The difference, however, is noticed in banks having added guideline overlay. Mortgage bankers abide strictly by the guidelines while banks add several layers of added protection/guidelines. An example of this: If a minimum down payment on a Fannie Mae product is 3 percent, a mortgage banker can allow it, but a traditional bank may require the minimum down payment to be 5 percent.

Banks add these extra layers for many reasons, and it’s not uncommon for banks to hand off loans to mortgage bankers when they can’t get the buyer approved.

Interest rates and fees:

Banks typically have higher mortgage interest rates because they have many more channels of revenue coming in. These added channels put less pressure on mortgage loan origination revenue, so banks can afford the chance to charge higher rates knowing many borrowers will end up going elsewhere for lower rates.

Mortgage bankers specialize in mortgage loan origination only, and therefore tends to be a market leader in terms of offering lower rates and loan costs. Additionally, mortgage banking operations tend to be leaner than traditional banks so there is less overhead to cover.

Process time:

With mortgage banks specializing only in mortgages, the loan process tends to be much quicker and client-friendly. Loan officers, loan officer assistants, processors, underwriters, closing, and compliance all should be within the same office for efficiency purposes. This isn’t the case with banks. It may not even be the case with larger mortgage banking operations. They often have processing “hubs” with support staff in another city or even another state.

If a borrower wants maximum efficiency and the best chance for their loan to close on time, they should do a quick bit of research to see if a company has multiple branches or is headquartered out of town. If so, they should consider contacting a locally based operation, like ours, to experience higher levels of personal service, speed, and competitive pricing.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268