Your first question might be, “There are different types of Mortgage Lenders?” The answer is yes. This is why some find it difficult and confusing when shopping for a mortgage lender to fit their lending needs.
There are so many different companies to choose from and they are all offering the exact same service and products. (Or are they?) Having an understanding of what the different types of lenders are and what the main differences between them are can help you narrow down your choices to the ones that you feel will best meet your needs.
Everyone’s home financing situation is different. It’s part of the reason why there are so many different types of loan products and why there are different types of lending institutions. The type of loan you get is crucial. Getting the right product that fits YOU can increase your chances of getting approved for the loan you need, for the property you want and save you money on both the front and back end. That is why it is so very important to take the time and shop. The field is crowded but with a little bit of knowledge, you can make the right choice.
The Four Types Of Mortgage Institutions
These are the banks you are probably most familiar with. Also known as retail lenders they are your local banks and even your big banks like Citi, Bank of America, Wells Fargo, and other familiar ones. You can go in and make deposits, open checking accounts, and savings accounts. They also offer CDs personal loans, business loans, auto loans, and also provide mortgage services. You can even lump credit unions into this category.
Yes, just like your depository banks you may find them in your neighborhood. Some do have brick and mortar locations, However, the BIG difference is that they only offer one product. You guessed it – Mortgages. That is their bread and butter. Some of these banks you might recognize are loanDepot, Quicken, guaranteed rate, and others.
This type of bank is different from the ones listed above because they fund loans with their own money. In other words, they originate their own loans. When the loan funds they sell to investors. Also, unlike the depository banks and mortgage banks, the direct lenders don’t service the loan.*
*Side Note: Loan servicing is when the company collects the interest, principal, and escrow payments from the borrower.
These can be a small (1)one-person shop, a loan officer team, or even be a company made up of many loan officers who work for them either remotely or in-house. What makes mortgage brokers unique is that they look at your scenario and then shop it to their network of wholesale banks. Some brokers may work with as few as 3 or 4 wholesale banks while others might have a much larger network to work with that could be as many as 20, 30, or more. This allows them to find the best deal or product that fits your situation. And just like any other lending institution they still abide by the same Fannie Mae and Freddie Mac mortgage lending guidelines.
What Type Of Mortgage Lender Is Best?
As we mentioned in the very beginning, everyone’s home financing situation is different. Some people have higher or lower credit, different amounts of down payment, specific time-frames for closing, longer or shorter-term plans to reside in the home, and different ways they get paid (W2, self-employed, commissioned, 1099’d). All of these, and others, are what make your mortgage needs unique.
Retail lenders, or depository banks, typically have more stringent loan requirements. Their overall offering of loan products can be small and they aren’t likely to loan out to more complicated situations. They prefer low risk, so buyers with higher DTI (debt-to-income) or lower credit scores may have a more difficult time finding approval at one of these institutions.
Mortgage banks, who can fund and service their own loans can be more lenient towards difficult situations. This means that because mortgages are their only product they can choose to take on more risk and will do so unlike retail lenders. The retail lenders want solid borrowers and they want all of your business. (Remember all of their other services?) Often these types of lending institutions will offer a wider variety of products than retail banks which allows them more flexibility. If you know your financial situation isn’t simple check here before your traditional depository banks. They could be a good option.
Direct lenders, unlike retail banks, only focus on one niche – mortgages. And as stated earlier they originate their own loans, process and underwrite everything in house. They usually are not as big as the mortgage banks but because they can assess their own level of risk when lending they generally have more flexible qualifying guidelines. This can give those with complex loan files a better chance of finding a loan to fit their needs. One downside is that, like retail lenders, they only offer their own products. Choices could be limited and borrowers may have to shop several different lenders to get comparisons.
Finally, mortgage brokers. Brokers are intermediaries between you and their network of lenders. They don’t loan their own money, they don’t underwrite and they don’t have the final say on your loan approval. However, their expertise is solely mortgages and they have access to an array of mortgage products for many different types of situations. For example, If you need a loan with a low down payment requirement or your credit is not so pristine, brokers are able to check with their lenders that offer products tailored for your situation. Based on your unique needs, a mortgage broker can talk to several lenders (on your behalf) to find loan products that you may be a fit for and get you the best terms and conditions. What’s not to like about that?
When it’s time for you to purchase or refinance be sure to look at all your options. If you do a google search you will find hundreds if not thousands of results. Take the time to visit their sites and get familiar with the products they offer. Using technology can be a great tool for narrowing your search. Once you do, we suggest picking up the phone and speaking with someone and asking questions. Any questions, no matter what it’s about. Ask about the pre-qualification process, ask about your specific situation, and anything else you can think of. If nothing else you can get a feel for how you will work with that loan officer and their team. Good Luck!