There are many types of mortgage lenders out there. Depending on your needs and which loan option you are looking for, one may be better for you than the other. With endless companies to choose from, you may feel stuck. Especially if you are a first-time homebuyer. Understanding the differences between each lender can help you make a sound decision. Let’s break down the main types of lenders.
A mortgage broker is a medium between lenders and you. These licensed professionals collect mortgage applications, and other documentation, to counsel you on things that could potentially strengthen your finances and raise your chances of approval. They do not control any guidelines when it comes to borrowing and typically get paid by lenders after loans are closed. Brokers often work for independent mortgage companies allowing them to shop a vast array of lenders so you don’t have to. This is a great way to find the best deal for you.
This is the most populated category. It includes credit unions, large banks, and online lenders like Quicken Loans. These companies borrow cash at short-term, dynamic rates. Then, rates come from warehouse lenders. This is specifically to fund the amount of money consumers need to borrow. Sometime after your loan is closed, these bankers go ahead and sell it to Freddie Mac or Fannie Mae. These are large agencies that cover nearly all mortgages in the United States. To conclude, bankers do this to repay that short-term note.
In a nutshell, a mortgage lender is a financial institution that offers home loans to consumers. Mortgage lenders have very specific guidelines when it comes to borrowing. For example, these guidelines come into play when verifying your credit. Also, they must see if you have proven you have the ability to repay the loan given. Finally, these lenders have the power to set the terms of your loan including the interest rate, your repayment period, and other aspects pertaining to your loan.
These lenders provide mortgages to consumers directly, rather than to institutions. This category includes big banks, mortgage bankers and credit unions. Also, retail lenders offer things other than mortgages. This includes personal loans, checking accounts, savings accounts, and more.
Portfolio Lenders fund your loan with their own cash. Firstly, this lender isn’t tied to ant interests, or demands, outside investors. This type of lender has the ability to set their own terms and borrowing guidelines. These terms may appeal to specific consumers. For instance, a consumer purchasing a large investment property may want to work with a portfolio lender.
Once a mortgage is issued, correspondent lenders come into play. They are considered the initial lender that creates the loan. The loan may even be serviced by them. Correspondent lenders sell mortgages to sponsors or investors. After that, sponsors will resell them on the secondary market to other investors. Remember, these investors can include Freddie Mac or Fannie Mae.
Direct lenders are just as they sound. They’re lenders that originate their own loans. Note, portfolio lenders and mortgage banks can also be considered direct lenders. Also, these lenders have more flexibility when it comes to their guidelines. They are able to offer more alternatives for borrowers. Finally, only their own products are offered. This means you would have to apply to multiple direct lenders to compare your options. Typically, you will find these lenders online only or they may have a few branch locations.
Hard Money Lenders
Think of this as your last resort. Typically, this option is chosen when a borrower doesn’t qualify for a loan with a portfolio lender. These lenders are private with notable cash reserves. Hard money lenders are flexible and close loans quickly. But, they charge high-cost origination fees. Also, they offer interest rates that reach 10-20%. Borrowers must pay hard money loans in only a few years. These lenders use the property in question as collateral. This is done to secure the loan. Due to this, this lender has the right to seize the property if you default.
These lenders are different from the rest. Warehouse lenders fund their own loans by offering short-term funding for borrowers. These loans must be repaid as soon as they are sold on the secondary market. Also, warehouse lenders don’t interact face-to-face. In this case, the mortgage is used as collateral.
There are so many types of mortgage lenders to choose from. Therefore, you need to feel solid in your final decision. Everyone’s needs and situations are different. If you are thinking about getting a home loan, you should speak with a professional about your options. They will help you choose the best option for you.