The same way you shop for the best home, you need to shop around for the right mortgage lender. This is how you find a bank offering the lowest rate and fees. But in the search for a mortgage, some borrowers play favoritism.
Rather than give every type of lender fair consideration, they lean toward big banks and give small mortgage lenders the cold shoulder. Understandably, big banks have a strong presence and can offer a generous selection of mortgage products.
Whether you’re thinking about getting a mortgage through a community bank, a credit union or a small mortgage company, here are four reasons to choose a small lender for your next home loan.
1. Lower Rates and Fees
Smaller mortgage lenders offer the same variety of products as larger banks, and sometimes you can take advantage of these products at a lower cost. Mortgage rates and closing costs vary from lender to lender with small lenders offering competitive—sometimes better—rates on different types of home mortgage loans. A lower interest rate can save you thousands over the life of a 30-year mortgage, and lower fees result in fewer upfront costs.
2. Faster Response Time
Big banks have a large mortgage department and these financial institutions can receive dozens of home loan applications a week. That’s a lot of paperwork to sift through, and it can take loan officers and underwriters several days to review documents and get in touch with applicants. Smaller lenders typically have a faster response time. While a bigger lender may forward applications to another mortgage department or branch, small lenders make many of their decisions in-house. The person who receives your application may be the final decision maker.
It’s often easier to work one-on-one with the underwriter at a smaller bank. You can experience a higher level of personal attention and assistance, which is important if you need advice on how to turn a mortgage rejection into an acceptance, or if you need advice on qualifying for a better mortgage rate.
3. Specialized Financing
Just about every mortgage lender offers products, such as conventional, FHA and VA loans. There’s also the option of a fixed-rate or an adjustable-rate mortgage. Big banks offer a variety of mortgage options, but there’s often a shortage of specialized products.
When you work with a community bank or another small mortgage lender, there's more opportunities for special financing. Whereas some big banks only offer 3/1 or 5/1 ARMs, some small lenders offer customers a wider selection of options, such as a 15/15 ARM where the interest rate only adjusts once over the life of the loan. Or maybe you’re refinancing your home and need a mortgage for less than $50,000. In this case, good luck finding a big bank to approve your application. Most large financial institutions aren’t going to touch a small mortgage because it’s not cost-effective, but a small lender might work with you.
4. Flexibility with Lending
The guidelines for getting approved for a mortgage with a big bank are pretty much written in stone and there's very little you can do to change the rules. There’s an established minimum criteria, and applicants who don’t meet this criteria can’t qualify for a loan.
Small lenders, however, can often approve mortgages that have been rejected by larger banks. This is because their guidelines and criteria differ. Some small lenders keep mortgages on their books instead of selling these to Fannie Mae and Freddie Mac. With these agencies out the picture, the lender doesn’t have to follow their strict lending guidelines. This gives small lenders the ability to relax their guidelines and approve borrowers who don’t qualify elsewhere, perhaps due to bad credit or irregular income. A borrower may have a low FICO score, but enough assets and income to support mortgage payments.
Big banks are often a borrower’s first choice, especially when there’s an established relationship, such as the borrower having an existing mortgage with the bank or deposit accounts. But just because you’re familiar with an institution doesn’t mean you can’t shop around and compare other lenders. In the end, it’s all about getting the best rate, the lowest fees and personable service. Big banks can offer a buffet of mortgage options, but they might not offer the flexibility and specialized programs you need to get your foot in the door.
