Community banks, which the FDIC defines as having under $1 billion in assets, generally focus on lending and collecting deposits. Most are either stand-alone corporations or are owned by a bank holding company, which is designed for the sole purpose of owning a bank. In contrast, most of the larger, more widely known banks are commercial banks that are owned by financial holding companies. They may have subsidiary companies engaged in different types of financial activities, including investment banking, insurance sales, credit cards and stock brokering.
Another important difference between community banks and large commercial banks is that community banks tend to concentrate their activities in small geographical regions, while large banks may conduct business nationally or even worldwide.
With their focus on a particular area, small banks may be more familiar with local conditions in the housing market than are the major commercial banks. As Richard Brown, Chief Economist of the FDIC said, "Community bankers tell us that they have local ownership, they make decisions locally and it's based on their knowledge of the local market area. They also tell us there is a different way of doing business at community institutions. Some researchers … have described" community banking as more "relationship lending instead of transactional lending."
Relationship lending can work in your favor when you’re applying for a mortgage. With their knowledge of the nuances of the local housing market, community banks may be more willing to lend you money than a commercial bank. In particular, this may apply if you already have a checking or savings account, or have a car or business loan, with that bank. Even better, the loan officer may personally know you, and with your banking history readily available, it is more likely that you would get a loan that a large commercial bank may turn down.
You might also take into account the benefit to your own neighborhood by conducting business with a local, community bank. Small community banks mostly gather deposits from their region and then tend to lend to local homeowners and businesses. Large commercial banks can get their deposits from sources around the world and fund loans across the country, as well as buying foreign currencies or bonds, corporate stock or bonds and various other securities.
Then, remember that a community bank’s localized service lends itself well to negotiations. Smaller banks want your business, since mortgage lending is one of their prime business operations, compared to large banks, which may make investments in many other areas. And you are often talking to the person making the lending decision, which should increase your odds of getting a better deal. They may be more flexible compared to the layers of bureaucracy you may have to wade through when dealing with a large bank.
Also, keep in mind that customer service is an area where local banks excel. If you need help, either while your mortgage is being processed or you have begun making payments, it is far easier to get an answer by stopping by your local community bank’s branch office and dealing face to face with your banker than it is to contact a loan officer from a large commercial, whom you have likely never met, by phone.
A good way to start the process of getting a mortgage is finding the most competitive mortgage rates in your area by checking BestCashCow.com. You can also use the sites’ mortgage calculator to see the monthly cost of a mortgage as well as to compare mortgages of different lengths.
Now you are ready to select a bank that will give you a mortgage with best possible interest rate.