Should I Use a Credit Union, Bank or Broker for My Home Loan?

When you're looking to buy a home, you'll quickly learn that there are many decisions to make, one of them being your choices in lenders. Sifting through your mortgage lender options is no easy feat! You must consider your purchasing intentions, your current financial and personal circumstances, and loan options that you qualify for.

To help you understand the differences in prospective lenders, we've compiled this compare and contrast list. 

Credit Union: Advantages & Disadvantages

A credit union is a non-profit organization interested in serving their specific consumer base. As a member, you will receive personal and compassionate service as they are very customer oriented. Credit unions are also known for providing lower costs for most services than banks, and that can often mean a lower rate on mortgage loans. 

Strong credit may qualify you for an (HELOC) Home Equity Line of Credit, which provides desirable terms of financing.

One possible disadvantage is their narrow selection of mortgage loans, which poses a significant problem if your credit is less than optimal. Another disadvantage is a possible delay in the loan process, that is, from processing to underwriting to funding. 

Bank: Advantages & Disadvantages

Banks provide beneficial programs for those on the higher end of the FICO credit spectrum. The process is cut and dry, as you will simply be approved or denied for a loan. 

If approved, the process is streamlined due to their single automated underwriting process. Banks have the ability to approve larger loans and more of them. 

However, the downside is their profit-driven intentions that often lead to higher interest rates, though they sometimes try to be more competitive if forced to by competition. They match the retail market rate for mortgages and will generally remain higher than credit unions or mortgage brokers.

Bank loan programs are often highly restrictive regarding credit history and income. It's not unheard of for even an average credit score to be denied during the application process. 

There are smaller mortgage banks or direct lenders that may bundle their own loans to sell to Fannie Mae or Freddie Mac just as do the big banks, or they may be strictly correspondent lenders to the big banks. Either way, they are direct lenders - just like big banks - that loan their own money. 

They have similar mortgage rates to bigger banks, however, many are more flexible about competing with Mortgage brokers. They may be able to expedite the loan process faster more quickly than big banks.

Also, a smaller "strictly mortgage bank" may broker your loan to an outside lender if they do not have the right loan for you. Consequently, this Mortgage Broker category is changing to include many "hybrids" that are a combination of Broker and direct lender.

Mortgage Broker: Advantages and Disadvantages

A strong advantage of using a mortgage broker is that many have streamlined mortgage process by going digital. Many borrowers prefer method as it makes the process easier. Borrowers can upload documents and complete the entire loan application securely and efficiently online. Borrowers also have the benefit of being in direct contact with their broker which is advantageous when a question or concern arises. 

Furthermore, many brokers have now attached themselves with a larger direct lender to offer both brokering and direct lending.

If you are not confident about your credit score, using a broker may a better option over a banker or credit union. You can skip the embarrassing denial from an institution as the broker will assist you in finding a lender and loan that are right for you. 

Are there any disadvantages? There may be depending on the broker.

Beware of their hidden motives, as brokers can vary in how much they want to make on the loan. If their fee is percentage based, it makes sense that a higher mortgage rate will create a larger compensation. Seek a broker with a strong reputation and good personality. 

Also, evaluate the Good Faith Estimate document, which expresses an estimate of fees associated with the mortgage service.

Making the Decision

Ultimately,  it may come down to who you talk to and feel most comfortable with. The individual loan officer will make a huge difference in your decision.  We recommend you interview someone from two of the above categories of lenders, or all three. 

All lenders understand that competing for your business is an important part of the mortgage loan industry and you are under no obligation to continue the loan process with anyone until you have made you final decision.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.