Bank or Broker? What to Consider when Looking for a Mortgage

For most of us, we think that finding the right place to call home is the biggest challenge in looking for a new place to live. What you may have not been aware of is that this is just the first hurdle to clear.

If you have found a prospective place to call home, the next objective to clear is securing a mortgage. Aside from checking which mortgages are available to you. Depending on how good your credit score is, you also have to iron out the issue of who you will have to deal with for the mortgage.

For mortgages and products similar to this, your only option would be either a bank or a mortgage broker. And this does beg the question: where should you secure your mortgage with? Just remember that either option is viable. Forr the option that will truly meet your needs, you will have to look at some few considerations.

How do Either of them Work?

Does it really matter where you get your mortgage? It does and it depends greatly on what you need and what you are willing to put up with.

Both brokers and banks actually follow strict guidelines in dealing with customers. If they are lenient with how they offer mortgages to prospective lenders, their ability to profit from the loan will be compromised.

In essence, you have to remember that these lenders adhere to a strong sense of structure in conducting their work. As such, you can expect for your transaction with them to follow a process which, in turn, gives you an impression of how good of a deal you are going to get with them,

As far as sourcing for their funds are concerned, banks are self-sustaining. In essence, they use their own money to fund whatever mortgage they close with their clients.

Structure-wise, all mortgage advisors, processors, underwriters, and every other person important to the mortgage transaction process work for the same entity: the bank. Upon funding, the loan will either be kept as part of the lender’s portfolio or it can be sold to investors.

Making all of this happen are the mortgage advisors who keep funding in high supply for the bank. They get most of what they earn from originating loans. This also means that their prices are mostly non-negotiable.

Aside from this, these advisors can only sell the products that their employers have currently available. This means that your options for a mortgage are relatively limited with banks.

Despite having non-negotiable prices, however, mortgage advisors coming from banks can offer the same mortgage at various price points.

Brokers

Our idea of a mortgage broker an independent sales agent selling all kinds of products coming from different lenders. Despite their smaller siz and influence compared to a bank, however, a broker has more options to offer.

Brokers often work with wholesale lenders who send rate sheets listing products and rates that would-be lenders could choose from. What is important to remember , however, is that a broker may offer rebates in their pricing especially for expensive mortgages. This will be used to pay off the broker’s commission and other costs on behalf of the borrower.

If the rate is lower, the only extra cost you would have to consider is the broker’s commission which is a minor fraction of the entire loan amount. Regional differences aside, the standard is always 1% across the world.

Pros and Cons

If you choose to deal with a bank, here are some of the advantages that you would possibly benefit from.

Easier Application Process

Throughout the duration of the loan, you will deal with the same department unless something outside from the mortgage itself would tell otherwise. This should gives you more control over the payments.

Less Onboarding

Since you likely have your current account and savings account with the bank, you are already their customer. This means that the requirement to identify yourself again or produce bank statements will reduce.

Low Pricing

When it comes the price, it is important to remember that you as the mortgagee would deal the most with interest. This means that banks offer generally low prices plus interest.

Experience

Banks have a larger combined experience compared to brokers in terms of providing products that the mortgagee would need and can manage. They can take their time in understanding what you need and negotiate the best possible terms with you.

This is because banks are essentially self-sufficient when it comes to funding. Except for dire circumstances, they won’t need to hurry up the negotiation process with you. All that matters is for you to sign with them which furthers the relationship that will be most definitely profitable for the bank. The general aim of the bank is to have a long-term relationship with you. In essence, they will become your one-stop shop for all financial events that happen in your life.

But with every advantage comes an equivalent disadvantage.

Lack of Transparency

A bank is not required to tell you how much they will make off you for your mortgage. If you are not careful, you might end up paying more for the mortgage and you wouldn’t even suspect it.

Limited Offerings

The product library offered by a bank’s mortgage advisor will be limited to the things that are affiliated with the bank. At best, you can get a handful of mortgage options with the bank as opposed to an entire portfolio’s worth of mortgage plans offered by a broker.

Stricter Approval Process

A bank can still reject your application even if you meet all the requirements. A person with an inferior rating but has been the bank’s frequent client will have an easier application process.

This boils down to the bank’s own prerogative or their in-house policies. Perhaps they consider other factors aside from your credit score or perhaps long-time customers get preferential treatment. Either way, your credit score will not only be the deciding factor to your application.

For brokers, they also have their own set of advantages unique to their setup. They are the following

Wider Selection

Since they are independent, brokers give you access to the offerings of multiple lenders. Instead of moving from one lender to another which takes time, you can get to view multiple products from multiple wholesale lenders at the same time.

The chances of you finding a specialized mortgage plan that meets your needs and your payment ability is higher with a broker.

Negotiable Prices

As far as pricing is concerned, brokers seem to be the more “customer-friendly” option. Brokers actually set their own profit margins and have payment terms that are easier to negotiate with.

Not only will you have better chances of finding a good deal, you can make that mortgage plan even better for you.

Transparency

If you wonder how much brokers are going to earn from the deal, they are required to tell that through the statement. Also, the law requires brokers to ell you exactly why the pricing for your mortgage plan is like that and that will include the percentage of their commission.

For brokers, their disadvantages include:

Less Procedural Control

Since a broker never works for the lender, they have little to no control at all at how long the process will take or how complicated it could get. For example, if you secured a deal with a broker and the broker submits your application to the lender, you might think that all is well and good.

However, just because you meet the broker’s requirements, it does not mean that the lender will easily approve of your application. There is a chance that they will put your file in their folder and forget about it. And there is nothing that you and the broker can do about it.

Complexity

With a broker, you are not dealing directly with a lender which means that you are adding extra steps to a process that is already fraught with complexities. And, of course, the added complexity does increase costs in the long term.

Longer Closing Time

Due to the multiple extra steps, there is no exact assurance that your mortgage would be approved within a few weeks or a month. This is not actually a problem if you are not in a hurry. But what if your circumstances force you to run on a tight schedule.

Let us say that you are planning to buy a house and you must close the deal in a month or so before the offer is passed to another buyer. If you seek a mortgage from a lender, there is no assurance that that mortgage will be approved within the short time table.

Which one Should You Go To?

There is no rule of thumb as to which funding source you should consider for your mortgage. A bank or a broker might be applicable for your case if certain conditions are present.

A bank is the best option for you if you are looking for a simple loan and have a good credit rating. On the other hand, a broker is good for you if you are looking for a very specific mortgage and have a subpar rating.

For example, a broker with a credit rating of 600 will not have a lot of mainline options. A broker, however, might help them secure more manageable loans with easier repayment terms. They know which lenders are lenient to applicants with poor credit scores and will most likely approve of your application.

In essence, in deciding if you should head over to a broker or a bank, ask yourself this question: what do you value the most out of the application process?

If you find value in a more secure process with minimal variables, then the bank is your best option. But if your case requires for you to look for a more lenient funding source, then a broker is your best option.

Either way, it is best that you obtain quotes from at least 2 to 3 brokers and banks respectively before you make your decision.

Your Credit Score and How it Affects Your Mortgage Rate

It is natural to want to get the best mortgage rates. To get a good rate, there is a lot that you can do which involves getting referrals or saving for the deposit. But these will not be enough.

Your credit score will actually lend a hand in you getting a good mortgage rate. This does not exactly mean that you won’t be paying a lot in interest fees over the lifespan of the mortgage. A good credit score can make your repayment manageable in the long term.

As such, it is important that you must understand how your credit score affects your ability to secure loans like a mortgage.

Credit Scores and Loaning

Your credit score is a critical factor in determining the range of mortgage rates that are available to you. To understand why your score is important, it is best to look at things from the lender’s perspective.

To you, a loan is just a huge sum of money that you can use for a lot of purposes. For the bank, however, that loan is their investment on you.

Depending on the terms of the loan, that mortgage will be payable by a decade or three. Over that time, a lot of things can happen like you changing jobs, you losing money, the neighborhood you live in changing, the market fluctuating, and other considerable yet critical changes.

Why Does Your Score Matter?

There is no exact way of determining if you are a safe investment just by an interview. This is where your credit score comes into play as it tells a lender whether or not you are trustworthy.     This is because a credit score will be reflection of your financial habits.

A lot could happen in the duration of your loan. Your assets could depreciate and you could lose your high-paying job or lucrative business. The ability to make sound financial judgements is a far more consistent criterion.

The Problems of a Low Score

Actually, low credit score applicants are not the only ones to find a mortgage difficult. The best mortgage deals is actually the difference between a good score and a great one.

Here is an example. Two people apply for the same mortgage. One person has a 760 credit score and the other has a score of 660. If their applications are approved, the person with a better score gets a 0.4% better mortgage deal.

The 0.4% difference might look insignificant but it does add up. The mortgage with a 0.4% better deal will save money by the hundreds to thousands.

How Scoring Works

It is important to review how the credit scoring system works as far as your mortgage rates are concerned. For this example, let’s use Experian which uses a range from 0 to 999 . Obviously, your risk to the lender inversely proportional to the range of your current score.

In essence, 0 to 560 I very poor, 561 to 720 is poor, 721 to 880 is fair, 781 to 960 is very good, and 961 to 999 is exceptional.

What is a Good Score for Buying a House?

Lowering your interest rate is actually still to the lender’s discretion. On the other hand, a difference of a few points in your credit score can affect your monthly payments substantially.

If you have a score at the Very Poor range, your mortgage application will be declined by lenders ASAP or, alternatively, you will find it harder to get a good rate with a manageable interest rate.

The poor range allows for basic mortgage deals with high interest rates. As such, careful selection and contemplation is needed before you sign off on a deal if your score is in this range.

At the Fair level, you can start getting good deals for your mortgage. The prices might be lower and the terms longer and the interest rates are more reasonable, giving you enough of a time to clear off your debt without paying essentially more on a monthly or annual basis.

The Best Range

If you hit the Good range, you start getting quite a lot of good mortgage deals. Offers at this range are more manageable on the long term with pricing options more favorable to you.

Conversely, a credit score at the Excellent range allows you to be first in line for rather good mortgage deals with interest rates that are the lowest in the market.

As such, it is best that you aim to get a score by the 721 to 880 range at the very least. The point is that a higher credit score means that you will only have to pay a minor fraction of the loan’s value in interest for the duration of your indebtitude to the lender.

Improving the Odds

As was implied, getting a low credit score does not immediately make you a bad investment option. It only means that anyone who is willing to lend you money is going to put you through the task of clearing your debts as quickly as possible and deal with a high interest rate.

By locking you to a rate that you would find difficult, they are at the very least putting a “security” over their investment on you and, in the end, make money off it.

Here is the problem: a low credit score is all too common in the UK these days. As a matter of fact, those who relatively young credit lives or are new to the country tend to get low scores.

Only keep in mind that lenders want to know that you can be relied on to fulfill your financial obligations on a regular basis. As such, your best remedy here is to improve your score by making some important lifestyle changes.

Frequent Payments

Paying your dues is one of the best methods to improving your score. This will include every debt, subscription, service, and membership you have entered and requires a regular payment. Even how often you pay your utility bills and even your landlord (if you are renting space) will matter here.

Timing

If it can be helped, try to give enough time in between your credit applications. The reason for this is because an inquiry is always made when you apply for new credit.

A hard search on your credit information done every 6 months is harmless. On the other hand, multiple ones done in a space of a few months can give the impression that you are becoming too reliant on credit. If mortgage providers see this, they are given the impression that you will barely manage one other obligation your already considerable list of debts.

Registering to Vote

Becoming registered on the local electoral register does give the impression to lenders that you intend to stay in one place for a considerable period of time.

By registering in one, you give the signal to lenders that you are there to stay and will not flee from creditors if your debts are due.

Staying within the Limit

This piece of advice is often misunderstood by many credit holders. Staying within the limit does not exactly mean cashing out on 99% only on a regular basis. Credit activity at that range is quite high which can negatively impact your score if done regularly.

There is no hard and fast rule as to how below the limits you should keep your spending with your credit. If you are aiming for the 800 to 999 range, it is best to keep your spending limits within the 25% mark. This, combined with other sound financial habits, should leave you with a score good enough for a good mortgage deal.

One other strategy you could use is making sure that your information contained in your report is accurate. Sites like https://creditscoreonline.co.uk can help you get a copy of your score from any of the major reporting agencies in the UK as a reference. You can use their services to check if the information being presented to lenders is correct or use it yourself and get an idea on how you could improve your score.

To Summarise

What a low score only means is that the lender will be more careful with you and make sure that you will uphold your end of the bargain by introducing some constricting terms in the contract.

A good score, as a matter of fact, gives the impression to lenders that you are a safe investment. If you have a score within the good to excellent ranges, you might even have an easier application process.

To summarise everything, your credit score will determine how good of a mortgage deal you can get from lenders. As such, it is recommended that you make a good impression when you present that application.