What are the Different Types of Mortgage Lenders?
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 have 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 terminologies you’ll hear around lending.
The Difference Between Mortgage Lenders and Mortgage Brokers
Many get confused about the difference between mortgage lenders and mortgage brokers even though 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, their 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. 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 upfront. 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.
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