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A Mortgage Lender is a bank or financial entity that provides and underwrites home loans. To check your creditworthiness and ability to repay a loan, lenders use specific borrowing guidelines. They decide on the mortgage’s terms, interest rate, repayment schedule, and other important details.
Although the type of loan you select is critical, selecting the appropriate Lender can save you money, time, and hassle. That is why it is critical to take the time to shop various mortgage lenders to find the right fit. The best mortgage lender is someone who takes the time to answer all questions you have, educates on the loans and programs, and listens to your needs. These characteristics are just as important as the rate and fees. In your home-buying research, you’ve most likely come across the terms “Mortgage Lender” and “Mortgage Broker,” but they have different meanings and roles.
There are many different types of mortgage lenders and the differences may be large or small. Additionally, it might not be that important or relevant for the average home buyer to know the differences. However, knowing the basic differences can give you greater confidence when approaching Lenders and Brokers. So, before you begin the process, do some research and educate yourself.
There are many different types of mortgage Lenders and sometimes people inaccurately refer to Brokers as Lenders. But, listed below are different types of Lenders to help educate about the various kinds of Lenders.
Direct lenders
(sometimes known as “banks”) are financial institutions that originate, process and fund loans. To put it another way, the firm with which you work is the one that lends the money. Large banks (such as Wells Fargo), credit unions, and mortgage companies that specialize in home loans are examples of direct lenders (like Quicken). A Direct Lender can also be defined as a Lending institution that sells directly to Fannie Mae or Freddie Mac.
Portfolio lenders
A Portfolio Lender uses its own money to fund borrowers’ loans that may not fit the standard guidelines determined by Fannie Mae and Freddie Mac. Portfolio Lenders establish their own lending criteria and terms, which may appeal to some borrowers who have unusual situations. Portfolio Lenders normally don’t sell the loans and service the mortgage every month.
Wholesale lenders
Banks and other financial institutions that sell loans through third parties, such as Mortgage Brokers, other banks, or credit unions, are known as Wholesale Lenders. Wholesale Lenders don’t engage with consumers directly, although they do create, fund, and occasionally service loans. Because the Wholesale Lender sets the terms of your home loan, the name of the Wholesale Lender (not the Mortgage Broker’s company) appears on loan documentation. Many Mortgage Lenders have retail and wholesale businesses. Shortly after a loan closes, Wholesale Lenders frequently sell it on the secondary market.
Correspondent lenders
Correspondent Lenders use warehouse lines of credit to fund the loan they have originated, underwritten and closed in their name. The loan is eventually sold to a larger Lender or Investor who will then resell them to Investors on the secondary mortgage market. Fannie Mae and Freddie Mac are the two largest investors. By selling the loan to a larger Lender or Investor, the Correspondent Lender eliminates the majority of the risk of default (when a borrower fails to repay). However, if the larger Lender or Investor declines to purchase the loan, the Correspondent Lender must either keep the loan or find a new Investor.
Brokers of mortgages — A Broker acts as a “middleman” between you and the best lender for your circumstances. Brokers deal with a variety of ‘wholesale’ mortgage businesses, allowing them to serve as a single point of contact for comparing different lending choices. Whether you’re a first-time home buyer or a homeowner looking to refinance, finding the best rate and lowest fees on your new loan is definitely your top priority. You must browse around with a few different Lenders and compare offers in order to discover a good price.
Warehouse lenders
By providing short-term capital, Warehouse Lenders assist other Mortgage Lenders in funding their own loans. When a loan is sold on the secondary market, warehouse lines of credit are typically repaid. Warehouse Lenders, like Correspondent Lenders, do not engage with customers. The mortgages are held as collateral by Warehouse Lenders until their clients (smaller mortgage banks and correspondent lenders) sell the loan.
Hard money lenders
If you can’t get a loan from a portfolio lender or if you flip houses, Hard Money Lenders are generally the last option. Typically, these loans are private corporations or people with substantial capital reserves. Because hard money loans must typically be repaid within a couple years, they appeal to fix-and-flip investors who purchase, renovate, and resell property for a profit. While Hard Money Lenders are known for being flexible and quick to close loans, they charge large loan origination costs, have interest rates as high as 10% to 20%, and require a large down payment. The property is also used as collateral by Hard Money Lenders to secure the loan. The lender can confiscate the residence if the borrower defaults.
Using a mortgage Lender for your loan has a number of distinct advantages. To begin with, they are likely to have access to a broader selection of credit products than a full-service bank. Because these companies specialize in mortgage loans, they are able to streamline the process far more efficiently than a bank.
Mortgage Lenders who don’t work for Federally Chartered banks have significantly more stringent requirements for licensing. They must register with the National Mortgage Licensing System (NMLS) to work as a Mortgage Lender. Mortgage Lenders must also have their fingerprints taken and their criminal records examined. Mortgage origination is prohibited for anyone having a history of some financial crimes, such as fraud. The FDIC, on the other hand, does not need the Loan Originator at a bank to show that he or she has specific expertise in order to obtain their required license.
A Mortgage Lender, on the other hand, requires substantial training to work in a mortgage firm. They must pass two exams: a national exam and a state-specific exam. Understanding of business and consumer protection legislation is emphasized in these tests. After obtaining a state license, a Loan Originator must renew it every year.
So, typically, Mortgage Lenders handle more mortgages that Loan Officers at a Bank. Since mortgages is their sole focus, a Mortgage Lender usually has more processes and systems to handle large volume and as a result, provides better service. Additionally, with the increased volume a Mortgage Lender handles, comes more experience with various lending situations. They may know how to overcome certain obstacles and unusual circumstances a Loan Officer at a Bank may not be familiar with.
Understand that the more knowledge you have, the better off you will be when searching for the right Lender. Always, make sure you are comfortable with the individual, they are great communicators, and are able to educate and find the best loan for you.
Remember that you aren’t limited to merely looking at Mortgage Brokers or banks. You are free to submit applications to as many different lenders and types of lenders as you desire. When looking for a mortgage, refinance, service member VA loan or any other loans get quotations from at least one Broker and one bank to determine who can provide you with the greatest price.
Finding the best Mortgage Lender today can be overwhelming and confusing with all of the options available. So, always look for someone who has your best interest in mind, can clearly communicate the options and is a great listener. These characteristics will usually provide a glimpse into what your mortgage experience will look like. Shopping for rates is important, but always remember that the individual and company you are working with will be just as important as the interest rate. A good rate doesn’t make up for a miserable experience and multiple surprises. It is easy to get sucked in by appealing rates online, but remember that large origination fees typically offset the benefit of the advertised rate. Additionally, keep in mind, many online Lenders many times will advertise a rate that isn’t available for the average client.
Here are some questions to consider before choosing a Lender and submitting your mortgage application:
The bottom line
It can be difficult to find the correct Lender and loan. Before you begin the process, do some research and educate yourself. This will give you greater confidence when approaching Lenders or Brokers. Have your paperwork in order and be honest about any credit, income, or savings issues so that Lenders and Brokers can recommend the best options for you.
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