Mortgage Lender Types
Your bank may be the first place that comes to mind when you are looking for a home loan. But did you know that there are other sources for mortgages? Generically known as "lenders," these sources include commercial banks, credit unions, mortgage companies, savings and loan associations, and mortgage brokers. Having such a range of choices can be confusing. So where do you begin?
To make the process simpler, start by thinking about mortgage lenders in two broad categories: mortgage bankers and mortgage brokers.
According to the Mortgage Bankers Association, a mortgage banker is "an individual, firm, or corporation that originates, sells, and/or services loans secured by mortgages on real property." In other words, a mortgage banker lends money directly to you. These direct lenders present you with the menu of loan programs they offer. If you want to compare their programs with options offered by other lenders, you will need to comparison shop across lenders yourself.
When mortgage bankers make you a loan, some do so with the intent of packaging your loan with others for resale in the secondary mortgage market. How does this impact your mortgage shopping experience? Oversimplified, it works like this: When mortgage bankers sell loans to organizations like the Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac), these loans must conform to rigid guidelines and specified loan limits. These stringent criteria make it more difficult for some borrowers to qualify. So if your credit is not flawless or you have a shaky employment history, you may consider approaching portfolio lenders.
Portfolio lenders usually create home loans that will become part of their own investment portfolio. They may also sell loans on the secondary market to replenish their reserves so they can issue more mortgages. But this is typically done when the loans are "seasoned" -- borrowers have made on-time payments for a specified period of time -- making the loan salable even if it does not meet strict Fannie Mae/Freddie Mac guidelines. Portfolio lenders can therefore be more flexible and lenient in their qualifying criteria. You may find, however, that you have to pay a higher interest rate to get that leniency.
Although mortgage brokers are often referred to as lenders, they do not directly make loans. Mortgage brokers are middlemen who are paid a fee to bring borrowers and funding sources together. They work as independent contractors and have access to, and often relationships with, multiple lenders. Therefore mortgage brokers can offer a wide range of loan programs. And by working with a network of lenders, a good mortgage broker can typically find a loan for just about any type of borrower credit.
More specifically, when mortgage brokers work for you, what role do they play? They present you with loan options from different lenders, take your loan application, and typically process the loan. Processing involves pulling together financial, employment, and other pertinent information. The broker then "shops" lenders for the right loan match and best terms for you. Keep in mind that the mortgage broker does not make the decision on whether your loan is approved or denied. That decision still rests with the lender that funds your loan.
No Matter Which Way You Go…
Give due consideration to the importance of working with someone reputable. Get referrals. Ask friends, family, or a real estate professional to recommend a mortgage banker or broker. See who has the best loan programs and see how interest rates and terms compare. And remember, the right choice for a lender is about what is right for you. There is no universal best lender. Every buyer is different, as are his or her loan needs and financial circumstances. Find a lender that you feel comfortable with and that you trust will provide the best mortgage to meet your unique needs.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.