Are local banks a better source for mortgage loans?

Posted by  on Aug 03, 2015

Q: Is there an advantage to getting a mortgage loan from a local bank?

A: Not necessarily, but it is certainly worth checking out.

According to a Federal Reserve analysis, community banks and credit unions account for about a quarter of new home loans, so they are a meaningful part of the market. That market share has been rising over time, so consumers seem to be finding these local institutions increasingly competitive.

When considering going to a local bank for a mortgage loan, there are some other aspects of the Fed's analysis that might interest you:

  1. Local institutions have a particularly large share of the market for home purchase loans, as opposed to refinancing or home equity loans. So, if you are looking to buy, a local bank might be a particularly apt choice to consider.
  2. Local institutions are more likely than larger banks to lend to low- to moderate-income borrowers and make loans in low- to moderate-income neighborhoods. If either description fits your situation, you might find a local bank more receptive than a large, national institution.
  3. Local institutions are less likely to sell off the loan after origination. Borrowers are often annoyed when they borrow from one organization only to find out soon after that the loan is owned by a different institution -- one they have no relationship with and did not choose. There is no guarantee a smaller bank won't do this, but apparently there is less risk of it than with a larger bank.

Of course, besides these characteristics of local bank lending, your decision should largely come down to mortgage rates. Include both local and larger institutions in a rate comparison and see which can get you the best deal.

Ultimately, what local institutions do is add to the choices you have available. For consumers, choice is power. In the end, whether or not you find an advantage in borrowing from a local bank, there is a benefit to at least including them in your search.


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