At this part of the home buying process, you’ve assessed your finances, sat down with a real estate agent to talk about the current market, and done some online shopping. This is the point where you apply for a mortgage. But before you do, what types of lenders are out there? And which of these types is right for you? Here we break down some of the different types of lenders and explain some of the terminology you’ll hear around lending.
The Difference Between Mortgage Lenders and Mortgage Brokers
Many get confused on the difference between these two, while their functions are vastly different. Simply put, a mortgage lender is a company that lends mortgages. The lender is the one from whom a buyer borrows the money to purchase a home, who sets the interest rates, and who the buyer pays back for the life of the loan.
Mortgage brokers work with multiple lenders on your behalf to get you the best possible mortgage rates and terms. The broker does not do any of the actual lending, just aids in the process of getting the mortgage signed. Mortgage brokers are agents, and after the deal is signed, they’re part in the process is finished.
Wholesale vs. Retail Lenders
Wholesale lenders are distinct in that very little of their lending is “client-facing” and they work mostly through third parties and mortgage brokers. Most wholesale lenders are large banks that farm out the application, qualification, and lending parts of the process to smaller firms.
The retail lender is, as opposed to the wholesale lender, “client-facing.” These are companies that do not loan through third parties, and smaller banks, credit unions, and mortgage bankers all count among examples.
Warehouse lenders are mortgage companies that loan to other mortgage companies. This helps new or smaller lenders originate their loans, and provide short-term lines of credit.
Mortgage bankers use their own funds or funds from a warehouse lender to originate a loan. Once originated, the mortgage banker can keep the mortgage in a portfolio or sell it to an investor on the secondary market, mainly for the purpose of collecting the fees associated with the mortgage.
Portfolio lenders are lenders that originate loans from their own portfolio and do not deal with the secondary market. Portfolio lenders are often “Savings and Loan” institutions or Credit Unions, although sometimes banks are portfolio lenders. Because the guidelines for underwriting a loan from a portfolio lender are different, benchmarks to qualify for this type of loan can be different as well. Some borrowers may find these types of loans easier to qualify for.
Hard Money Lenders
Hard money lenders are private investors, who could be an individual or a group of investors. Hard money loans are short term, high interest, high-down payment loans with points up front. Interest rates on these loans rate from 12-21% with 25% down. The benefit of these loans is that they take less time and are much less complicated to complete, and are generally preferred by builders, investors, and house-flippers.
A direct lender is any company that lends directly to you and does not act through a third party. Direct lenders are differentiated from a mortgage broker, who acts as an agent. Direct lenders are also, therefore, retail lenders.
Correspondent lenders are lenders that fund and originate their own loans, but underwrite them in such a way that they can be sold quickly to larger lenders. Homebuyers who borrow from correspondent lenders will see their loan be sold very quickly after the deal’s closing.
Back to: Build Your Real Estate Team
The Home Buying Process Demystified
The home buying process is wrought with potential pitfalls and challenges, but when done right can be relatively painless. As champions of homebuying, we’ve created this step-by-step guide to help you through the process.
Below you’ll find an overview of the home buying timeline as well as the major components of the home buying process with links to the various steps, tools, and information to educate and empower your home search, discovery and purchase.
How Long Does it Take to Buy a Home?
Your timeline may vary, but the following is a good guideline
- Preparing to Buy a Home: 3-4 weeks
- Initial Search for Ideas: 1-4 weeks
- Building a Team: 1 week (overlap initial search)
- Pre-Approval of Mortgage: 12-48 hours
- The Home Search: 4-8 weeks (depending on criteria)
- Contract-to-Close: 14-60 days
So, on average a homebuyer will spend 30-60 days shopping and 14-60 days from contract to close. For some folks, the process can be extremely quick taking as little as 30 days total, while for others, the shopping period alone can last several months.
How Much Home Can I Afford?
The first step in the home buying process is understanding if you have the resources to buy a home. This includes knowing how much home you can afford, what type of down payment and monthly mortgage payment to budget for, as well as what type of loan program you’ll use to finance your new property.
Buying a home is a complicated process that requires a good deal of research. In the course of it, there will be a number of professionals and specialists involved. Once you’ve done your homework and assessed your resources, you’ll need to assemble your team.
Assembling Your Team
After you have a good understanding of your own wants, needs, and goals, it’s time to assemble your team and begin the home search! Who should be on your team? Who you’ll need to find on your own may vary, but the key team members could be: Real estate agent (could be a RealtorTM but not all agents are), home appraiser, title company, home inspector, insurance agent and mortgage lender.
When selecting the members of this team, take the same amount of care you would in choosing a home, because these people will be working for you to help you do just that. Trust & communication are key considerations in working with your team.
Sorting Out Your Finances
With the selection of a mortgage lender comes the application for mortgage pre-approval, a task that requires collecting the necessary financial paperwork to help obtain the approval. Once obtained the clock begins ticking because many pre-approval offers have a limited life-span before they expire.
Your Home Search
While you juggle the paperwork and timelines implicit to the process, remember that your team works for you. Now your search for (and discovering) your new home begins. Research, save, view and repeat. Remember Homes.com has all the tools you need to find and keep track of your favorite properties and home shortlist.
You’ve got a mortgage pre-approval in hand and have found a property you can afford to purchase and see yourself living in. Time for a purchase offer to a listing agent or seller!
Once you receive an acceptance offer, the due-diligence period starts a timeline of checks and tasks for final mortgage approvals, appraisals, inspections, and other requirements that would be stated in the terms of the contract.
Assessment, Conditions & Negotiation
Many consider this to be the most difficult part of the home buying process as it includes, but isn’t limited to, inspection, obtaining the final loan, purchasing insurance, and the potentially arduous negotiation. In this part of the process, every member of your team will be utilized, and the more homework you have done in building your team, the smoother this part will go. Those who haven’t conducted their proper due diligence could potentially see the purchase fall apart at this point.
Closing the Deal!
A successful closing requires all of the team players to come together at the same time, with the same agenda, on the same date, with numbers and figures that match. From the start of the home search to the home inspection and closing the deal, the entire home buying process can take most homeowners about three months.