There are numerous options for mortgage lenders out there, and those new to the mortgage game might feel overwhelmed by all of the options as well as the jargon. This article will help you understand the different kinds of mortgage lenders and the benefits of working with each particular type.
A direct lender is an entity that creates its own loans (and there is not a distinction between lenders that use their own funds for this process and those that use borrowed funds). Mortgage bankers and portfolio lenders can fall into this category. The distinction with these direct lenders is that direct lenders do not perform like agents for a wholesale lender.
- More often than not, direct lenders also have a hand in the retail lending market as well since this market does not include third parties.
Warehouse lenders are the most similar to wholesale lenders, although warehouse lenders loan money directly to banks or other lender institutions (who issues the loans on their own terms and through their own channels). When that mortgage lender sells the loan on to investors, the warehouse lender is then repaid.
- Warehouse lenders loan money directly to the banks, who issue the loans
What differentiates these lenders from other types is not what happens in the process as the loan is applied for and issued, but rather by whatever occurs after the loan has already been issued. Sponsors are another common term for correspondent lenders, because these investors work with the lender. A sponsor verifies that the purchased mortgages meet particular criteria. The majority of the time these lenders are using Fannie Mae and Freddie Mac.
Correspondent lenders like to verify that the loan meets criteria because appropriate applications will earn them 1 or 2 points when the final mortgage is issued. Selling the loan to a sponsor is appealing to the correspondent lender since the risk is transferred to this other person. The sponsor also withholds the right to decline the loan if they feel that it doesn’t adhere to their own standards (leaving the correspondent to either find another sponsor or back the loan personally).
- If a sponsor feels that the loan has met minimum standards, this can be a great route for those pursuing a mortgage
Retail and Wholesale Lenders
Wholesale lenders refers to institutions like banks that may not be directly involved with the consumer but instead make their loans available through credit unions, mortgage brokers, and even other banks. Typically, only large banks linked through retail will be involved in this market.
- These lender won’t work directly with lenders, but they have many options available through various outlets
Hard Money Lenders
For many people, a hard money lender is the last option if they have failed to qualify through another lender source. These are generally private people with money to lend, but they set very high interest rates and require significant down payments. For the person in the right financial situation, but if you don’t have the funds for a large down payment, the interest rates can make this a true last resort situation.
- It can also be challenging to get a hard money lender to work with a long term loan, since these individuals often prefer to work with short-term scenarios.
Portfolio lenders actually front their own money for the home loan process and these loans are contained in their loan portfolio. This is a great option for any borrower who’s considering something outside the norm- such as bad credit but good wealth overall, needs for a jumbo loan, or are considering investment property.
Portfolio lenders are not required to abide by the guidelines set by Fannie Mae and Freddie Mac and these lenders can generate their own rules to weed out applicants. When a borrower has continued to make payments on their portfolio loan for longer than one year (barring any late payments during this 12 month period), the loan becomes “seasoned” and therefore becomes more marketable, even if the loan didn’t initially meet Fannie Mae or Freddie Mac guidelines.
- This loan will appeal to those who want a chance to get the loan seasoned and demonstrate positive payment habits
One of the most confusion combinations in mortgage lending is comparing mortgage bankers and mortgage brokers. A mortgage banker does not lend their own money, instead borrowing money from warehouse lenders to cover the costs associated with the mortgages. They create the mortgage but then sell it off to investors in order to repay their own note. Most of the time, these transactions happen through Fannie Mae and Freddie Mac.
- A mortgage banker does not lend his or her own money
Lenders in this category actually make the loan and front the money that will be used to purchase a home or to refinance a mortgage that’s already in place. Each mortgage lender will have a bar set for the various terms of the applicant, especially credit worthiness and the financial background and ability to pay for the loan.
- Mortgage lenders have minimum standards that loan applicants must meet
Mortgage brokers are not involved in making loans themselves. Instead, they communicate with several lenders in order to find the one with the best rates and scenario for that particular client. In this way, you can think of a mortgage broker as like an agent, since in the final process you’re actually borrowing from the lender as opposed to the broker. Brokers are often able to get discounted rates because of their relationship with the lenders, so going this route as opposed to going to the lender as a retail customer could help your bottom line rate- unless the broker has added their own fee into the equation.
- Even if the broker has evened up the rates by adding their own fee, you’re often likely to get a good deal here since the broker is familiar with all the lenders and can help to narrow down the best option.