What are the different types of mortgage lenders out there?
Whether you’re looking to buy or refi, there are plenty of companies competing for your business. While they all serve the purpose of financing a real estate purchase, they can look very different from each other. So how do you decide where to go and what to look for?
Here’s a quick rundown on the different types of lenders, and how I, as a real estate agent, would go about getting my own financing. These types of lenders work with conventional home loans, FHA-insured loans, and VA-insured loans.
1. Big Banks (and credit unions) – these are the institutions where you may already have checking and savings accounts. This is where my parents and grandparents would have gone (wearing a business suit) to apply for a loan. Most big banks and credit unions still operate from local branch offices, where you can meet with someone in person.
2. Direct Lenders/Mortgage Bankers – these are privately-owned companies that technically loan you their own money, and then often sell off the loan to the secondary market, with no change in your terms. More accurately, they have direct approval to loan money on behalf of Fannie Mae (FNMA, or Federal National Mortgage Association), Freddie Mac (FHLMC, or Federal Home Loan Mortgage Corporation), the Veterans’ Administration, and the Federal Housing Administration.
3. Mortgage Brokers – mortgage brokers act as the middle man, or broker, between you and a lender. They take your application, and then shop your loan file to big banks and/or direct lenders, to try to find you a loan program and attractive interest rate. What happens next depends on the mortgage broker. Some mortgage brokers hand off the underwriting and processing to someone else. Other mortgage brokers manage every step until the loan is funded.
So what about all the online lenders? Are they mortgage brokers?
Actually, online lenders can be #1, #2, or #3. Very often, they are mortgage brokers. You answer some basic financial questions on their website, and they return with multiple offers from various companies.
So who can give you the best deal?
Lenders often promise super low rates, but it’s important to remember that the “best deal” includes all terms of the loan: interest rate, down payment, one-time processing fees, and any mortgage insurance. Promises of ultra-low interest rates might come with high processing fees. Promises of cash back toward closing costs often come with higher interest rates.
Lenders are big banks, mortgage brokers, or direct lenders.
Big Banks
Big banks sometimes offer incentives to their existing customers, such as low closing costs or even principal reduction with on-time payments. However, they are restricted to their own loan programs, so may not be as competitive as mortgage brokers and bankers. The approval process can be more structured and take days longer than other lenders.
One disadvantage is if a lender is not based locally. It may be difficult to contact a loan processor who is out of state, or who only works during banking hours. If you decide to write an offer over the weekend, you may need to wait until Monday for a pre-approval letter.
Mortgage Brokers
Mortgage brokers, who only act as the middle man, sometimes have little control over the actual loan process, since another company is processing the underwriting the loan.
On the other hand, some mortgage brokers manage the entire process. If the mortgage broker is local, he or she may be available during weekends to answer questions or write pre-approval letters.
Direct Lenders
Mortgage bankers, or direct lenders, tend to have more flexibility and speed in the approval process, since it’s their own money to lend, and they are also very competitive with rates. They process and underwrite your loan in-house, so it usually goes faster than another type of lender.
Direct lenders also tend to have a wider variety of available loan programs to cater to your particular financial situation, including Renovation Loans. Mortgage bankers can sometimes approve someone who cannot qualify with a big bank.
Getting Started
When you’re ready to buy a home, it’s a good idea to shop around, and apply to multiple companies, until you find a loan program and terms that make you feel comfortable. It doesn’t hurt your credit score if you submit multiple mortgage applications. It’s also relatively easy: once you have the loan package scanned together as a .pdf file, it doesn’t take much extra time to send it to one more e-mail address.
Consider one-time processing fees, any mortgage insurance fees, the interest rate, fixed rate vs. adjustable rate, and any other terms of the loan. These terms vary across the three main loan types: conventional, VA-insured, and FHA-insured mortgages.
You can also check with a trusted real estate advisor to find out what kind of experiences they have had with lenders. While I tend to prefer direct lenders and local mortgage brokers, your credit union may be able to offer you a program that better fits your needs. Programs change often, so it’s important to shop around.
Today we have very strict laws prohibiting real estate agents and mortgage lenders from compensating each other for referrals. Any reputable real estate professional can give you experienced, objective advice about which lenders they have enjoyed working with.
Direct lenders and mortgage bankers tend to be more flexible with qualification. For example, I have seen cases where small business owners couldn’t document enough income to qualify with a big bank. On the other hand, they have successfully worked a direct lender. Direct lenders are able to count asset depreciation and use other techniques to make a mortgage possible.
For More Information
If you’re considering buying or refinancing, I wish you a pleasant and successful experience. Feel free to send me any questions or comments.
You can also read about How to Get Loan Preapproval, and How Much Mortgage Can I Qualify For? To help plan your closing costs and monthly expenses, you can use my Cost to Buy a House Worksheet and Monthly Housing Costs Worksheet.
In 2015, the Consumer Financial Protection Bureau released a toolkit. This kit helps guide consumers through the process of shopping for a mortgage and buying a home. The Home Loan Toolkit can help you plan your purchase.
Want to learn more? You can always participate in a no-cost online home buyer workshop. This new tutorial is a comprehensive homeownership education course. CreditSmart® Homebuyer U offers six modules to promote education, homebuyer preparedness, and financial management.
Good luck! As always, contact me with any questions.
I couldn’t have written this article without the expert advice of Nick Richardson:
Nick Richardson is a mortgage banker with EZ Fundings in San Diego, California, NMLS #966361. He can help you finance or refinance properties located in California. Nick can answer all of your questions about mortgage programs, with no hassle, no obligation. Contact him at 760-402-6962 or e-mail nick@ezfundings.com.
