When it comes to financing your mortgage, trying to navigate the labyrinth of lenders can get confusing. Like any significant financial transaction, there are advantages and disadvantages that come with each type of lender. Get started by asking your realtor for referrals. With a large commission at stake, realtors have the right sort of incentive to refer you to specific loan officers or brokers who have proven track records of getting loans approved quickly and at competitive rates, or who have experienced success with unique financial circumstances that are similar to yours. Second, having a solid understanding of the various players and their roles in the market will help prepare you for the process. To enhance this understanding, we provide the following overview:
Mortgage Bankers or Mortgage Lenders tend to be larger financial institutions — trusted national brands — that originate loans and sell them to Fannie Mae, Freddie Mac and other loan investors. Mortgage banks use deposits from customers or borrow short-term rates from warehouse lenders to make loans. They then sell the loans on the secondary market and repay the short-term notes. While mortgage banks can often close your loan more quickly than other types of lenders, if you decide to comparison shop, you will have to complete loan applications for each individual institution, which could prove to be fairly time-intensive. If you do not qualify for a loan product through the mortgage bank, your loan officer may still be able to broker your loan through a wholesale lender, but loan officers at mortgage banks are naturally more focused on selling (and most knowledgeable about) their own products. So if your loan officer brokers your loan through a wholesaler, be sure to ask many questions and read the fine print to make sure the loan truly suits your needs.
Retail Bankers or Direct Lenders typically have local retail offices staffed with loan officers who conduct loan origination. You deal directly with this type of institution — without a middleman, only bank employees review your loan application. Direct lenders frequently offer enticing incentives for first-time homebuyers. They also offer additional savings on your loan if you bundle several types of financial services through them. Direct lenders sell their loans to larger financial institutions and are similar to mortgage brokers in that they shop several banks, but because they underwrite and fund the loan (unlike brokers), they retain control over the transaction.
Wholesale Lenders rely exclusively on mortgage brokers, credit unions and banks for loan origination. They do not deal directly with consumers. Wholesale lenders make the loan and the broker, bank or credit union acts as an agent in exchange for a fee. However, many mortgage bankers and portfolio lenders sometimes operate both wholesale and retail lending divisions.
Mortgage Brokers originate loans, but broker them to wholesale lenders. Underwriting and funding are provided by the wholesale lender, and brokers receive commission on the loans. Brokers have access to hundreds of wholesale lenders and have a thorough understanding of national and regional qualification requirements. Because their role is to advocate on your behalf, brokers can efficiently match your financial situation with specific loan programs to increase your odds of getting your loan approved. They can also help you compare rates quickly, drastically minimizing the amount of paperwork per submission. Rely on your realtor and other trustworthy referral sources to identify an experienced loan officer, especially if your situation is complicated in any way. While brokers are and should be fairly compensated for their matchmaking services, some are notorious for tacking hidden fees onto the loan. Another thing to consider is once the loan is in place, the broker has no authority over the transaction.
Portfolio Lenders include institutions such as credit unions, Savings & Loans and community banks. They offer adjustable rate loans that are easier to qualify for than fixed rate loans. Savings & Loans, as well as some banks, are mortgage bankers, portfolio lenders, or both. Portfolio lenders tend to promote their own portfolio loans and compensate their loan officers better for adjustable rate loans than for fixed rate loans. The primary focus of this type of lender may include a more extensive documentation surrounding the savings history of the individual interested in the loan. These institutions fund loans through their customers’ deposits, keeping the loans in their portfolios. This type of lender is more suitable for special circumstances such as investment properties and jumbo loans.
Correspondent Lenders are a blend of brokers and retail lenders. They fund the loans, but work with sponsors or investors (such as Fannie Mae and Freddie Mac) who then purchase the loans if they meet certain criteria. When a mortgage loan is made, correspondent lenders earn money by collecting a point or two, then immediately sell the loan to a sponsor. However, if they cannot find a sponsor or investor, then they are forced to carry the loan.
Some homebuilders and real estate companies also create their own mortgage companies or “controlled business arrangements” (CBAs) to maximize their profitability. Closing on a new build is quite different from closing on an existing property, which can cause delays if your loan officer or broker does not have extensive experience in this area. CBAs can speed up the process by muscling their way through the bureaucracy, but the compromise may be higher interest rates on your loan.
Once you have familiarized yourself with the main types of mortgage lenders, keep in mind these definitions may not be mutually exclusive. That’s because many financial institutions employ multiple lending strategies to maximize their market share. At the end of the day, all you care about is getting the lowest possible interest rate and fees on your mortgage, while getting prompt, personalized attention from your loan officer. By approaching different types of mortgage lenders – and understanding what makes them tick – you enhance your probability of accomplishing your goal of affordable home ownership.