Local Mortgage Lenders vs Big Banks

When you decide to buy a property, choosing which mortgage lender to work with can be almost as overwhelming as trying to find the perfect house. There are a wide range of offerings available, but in general there are two main types of lender: mortgage lenders who specialize in home loans and retail banks who provide mortgage loans as part of a larger suite of services.

There are advantages and disadvantages to working with both types of institution, and which option you choose will depend on your unique circumstances. Given that the mortgage application process is rigorous, it’s a decision that warrants some careful consideration. Here, we’ll explain the difference between local lenders and national retail banks, as well as the pros and cons you can expect when working with both.

Local Lenders: Pros and Cons

Local mortgage lenders are just that—local. These lenders may specialize exclusively in mortgage loans, or they may belong to a local credit union that offers other types of financial services, such as auto and personal loans, as well as home equity loans or HELOCs. In general, these lenders are smaller, community-based financial institutions that provide mortgage loans to borrowers in a specific geographic area.

There are pros and cons that come with these lenders’ smaller size and focus on a specific community. Some of the most important advantages and disadvantages to consider when making your choice include:

Pros

More personalized service. Local lenders often provide more personalized attention and better customer service. You can probably meet your loan officer face-to-face if you’d like, but either way you’ll be able to take advantage of their expertise to help guide you through the mortgage process while addressing your specific needs.

• Local market knowledge. A local mortgage lender should have a deep understanding of the local real estate market. That knowledge can help you secure the right mortgage terms and rates for the community where you’re looking, which could result in your offer being taken more seriously.
• Brand recognition. For some borrowers, taking out a loan through a local credit union or bank will provide a sense of stability and trust that national lenders just can’t match. It all comes down to service and support: local real estate agents may have connections with a local lender, so paperwork is smoother and faster.
• Flexibility. Local lenders may be more flexible in their underwriting criteria—things like the minimum credit score or debt-to-income ratio requirements. Because they’re smaller and more independent than big banks, they can consider unique circumstances or non-traditional loan scenarios for buyers in their community.
• Quicker turnaround. Again, due to their smaller size, there are likely fewer steps in the underwriting process. As a result, local lenders can often approve and close on loans faster than national retail banks.
• Relationship building. Local lenders can help you with things other than just your mortgage loan. These institutions focus on building long-term relationships and may offer to guide you toward the best neighborhoods for you, as well as help you find an excellent realtor. Even after the loan is closed, a local lender is likely to provide ongoing support.
• Flexible loans. Local lenders can sometimes be more flexible and creative when it comes to approval, mortgage terms, and underwriting.

Cons

• Fewer product options. Because these institutions are smaller, local lenders may have a narrower range of mortgage products compared to big banks. Local lenders will almost always have conventional loan options, however.
• Potentially higher rates. Since they operate on a smaller scale, interest rates and fees from local lenders may be slightly higher—although this is not always the case. Sometimes the interest rates are better than big banks!
• Limited footprint. Due to their local nature, these lenders usually only have branches or offices within the geographic area they serve. That means if you move or need assistance in a different location, you might not be able to find a physical location.

Big Banks: Pros and Cons

In contrast, to local lenders, retail banks are large financial institutions that serve customers at a national (sometimes even international) scale. Due to their larger size, big banks are able to offer a wide range of financial services, including mortgage lending.

National lenders can offer potential borrowers a few advantages over their smaller, local counterparts. However, there are two sides to any coin and some of those advantages might prove to be more of a drawback, depending on what you’re looking for in a mortgage lender. To help you make your decision, here are some of the pros and cons of using a big bank when buying a home:

Pros

• Wide range of products. Big banks are, well, big. That size means they can offer a variety of mortgage products and services to choose from.
• Competitive rates. Due to their large size, big banks often have more access to capital markets. This greater access can sometimes allow national banks to offer competitive interest rates and fees, which may be lower than what you can find at a local lender.
• Technology and convenience. Larger banks tend to have more advanced online platforms, featuring mobile apps and automated payment features that allow you to manage your mortgage with greater convenience.

Cons

• Less personalized service. With more customers comes less personalized service. Big banks may not be able to offer the same level of personal attention to each of their customers as compared to local lenders due to the sheer volume of borrowers.
• Stringent requirements. Big banks are able to cast a wider net for customers, and with more demand they can often be choosier in who they decide to approve for a loan. As a result, national banks often have stricter underwriting criteria, making it more challenging for some borrowers to qualify for loans.
• Lengthier processes. Due to more byzantine organizational structures, where multiple departments may have to communicate with one another in order to make a decision, the approval process at a big bank may take longer.
• Limited local market knowledge. Because they focus on serving a broad customer base across many different markets, big banks often can’t offer the same level of in-depth understanding of local real estate markets that local lenders possess.

Choose What Works for You

Local lenders and big banks both have their own pros and cons. Ultimately, the choice you make will depend on your preferences, specific mortgage needs, and the level of service and flexibility you prioritize. Before you make a decision that will impact your finances for many years to come, carefully consider your priorities, compare options, and weigh the pros and cons to make an informed decision.