Direct lenders originate their own loans. These lenders either use their own funds or borrow them from elsewhere. Mortgage banks and portfolio lenders can be direct lenders. What distinguishes a direct lender from a retail bank lender is specialization in mortgages.
Retail lenders sell multiple products to consumers and tend to have more stringent underwriting rules. With a niche focus on home loans, direct lenders tend to have more flexible qualifying guidelines and alternatives for borrowers with complex loan files. Direct lenders, much like retail lenders, offer only their own products so you’d have to apply to multiple direct lenders to comparison shop. Many direct lenders operate online or have limited branch locations, a potential drawback if you prefer face-to-face interactions.
A portfolio lender funds borrowers’ loans with its own money. Accordingly, this type of lender isn’t beholden to the demands and interests of outside investors. Portfolio lenders set their own borrowing guidelines and terms, which may appeal to certain borrowers. For example, someone who needs a jumbo loan or is buying an investment property might find more flexibility in working with a portfolio lender.
Most mortgage lenders in the U.S. are mortgage bankers. A mortgage bank could be a retail or a direct lender – including large banks, online mortgage lenders like Quicken, or credit unions.
These lenders borrow money at short-term rates from warehouse lenders (see below) to fund the mortgages they issue to consumers. Shortly after a loan closes, the mortgage banker sells it on the secondary market to Fannie Mae or Freddie Mac, agencies that back most U.S. mortgages, or to other private investors, to repay the short-term note.
Wholesale lenders are banks or other financial institutions that offer loans through third parties, such as mortgage brokers, other banks or credit unions. Wholesale lenders don’t work directly with consumers, but originate, fund and sometimes service loans. The wholesale lender’s name (not the mortgage broker’s company) appears on loan documents because the wholesale lender sets the terms of your home loan. Many mortgage banks operate both retail and wholesale divisions. Wholesale lenders usually sell their loans on the secondary market shortly after closing.
Correspondent lenders come into the picture when your mortgage is issued. They are the initial lender that makes the loan and might even service the loan. Typically, though, correspondent lenders sell mortgages to investors (also called sponsors) who re-sell them to investors on the secondary mortgage market. The main investors: Fannie Mae and Freddie Mac. Correspondent lenders collect a fee from the loan when it closes, then immediately try to sell the loan to a sponsor to make money and eliminate the risk of default (when a borrower fails to repay). If a sponsor refuses to buy the loan, though, the correspondent lender must hold the loan or find another investor.
Mortgage brokers work with a host of different lenders, but it’s important for you to find out which products those lenders offer. Keep in mind that brokers won’t have access to products from direct lenders. You’ll want to shop a few lenders on your own, in addition to one or two mortgage brokers, to ensure you’re getting the best loan offers possible.
How They Get Paid
Mortgage brokers (and many mortgage lenders) charge a fee for their services, about 1% of the loan amount. Their commission can be paid by the borrower or lender. You can take a loan at “par pricing,” which means you won’t pay a loan origination fee and the lender agrees to pay the broker. However, mortgage lenders typically charge higher interest rates. Some brokers negotiate an up-front fee with you in exchange for their services. Make sure you ask prospective brokers how much their fee is and who pays for it.
How They Help
Mortgage brokers can help save you time and effort by shopping multiple mortgage lenders on your behalf. If you need a loan with a low down payment requirement or your credit is not so pristine, brokers can look for lenders that offer products tailored for your situation. Brokers typically have well-established relationships with dozens, if not hundreds, of lenders. Their connections can help you score competitive interest rates and terms. And because their compensation is tied to a loan closing successfully, brokers tend to be motivated to deliver personalized customer service.
Once a mortgage broker pairs you with a lender, they don’t have much control over how your loan is processed, how long it takes, or whether you’ll receive final loan approval. This can add more time to the closing process and frustration if delays arise. Also, if you choose a loan at par pricing, your lender might charge a higher interest rate to cover the broker’s commission, costing you more.
Retail lenders provide mortgages directly to consumers, not institutions. Retail lenders include banks, credit unions, and mortgage bankers. In addition to mortgages, retail lenders offer other products, such as checking and savings accounts, personal loans and auto loans.
Hard Money Lenders
Hard money lenders are usually the last resort if you can’t qualify with a portfolio lender or if you fix-and-flip homes. These lenders are usually private companies or individuals with significant cash reserves. Hard money loans usually must be repaid in a few years so they appeal to fix-and-flip investors who buy, repair and quickly sell homes for profit. While hard money lenders tend to be flexible and close loans quickly, they charge hefty loan origination fees and interest rates as high as 10% to 20% and require a substantial down payment. Hard money lenders also use the property as collateral to secure the loan. If the borrower defaults, the lender seizes the home.
Shopping for a Mortgage Online
In today’s tech-savvy world, many mortgage lenders and brokers have automated the application process. This can be a huge time-saver for busy families or professionals as they balance choosing the best mortgage, searching for a home and their day-to-day lives. Some lenders even provide apps so you can apply, monitor and manage your loan from a mobile device.
The Bottom Line
Finding the right lender and loan can feel daunting. Researching and educating yourself before you start the process will give you more confidence to approach lenders and brokers. You might have to go through the pre-approval process with a few lenders to compare mortgage rates, terms, and products. Have your documentation organized and be frank about any challenges you have with credit, income or savings so lenders and brokers offer you products that are the best match.
Not All Mortgage Lenders Are Created Equally
When it comes to pricing, they’re not always honest, either. You want to know who you can trust and who may save you money, plain and simple. The Lending Network erases any doubt with their Better Price Guarantee. Get the best mortgage price, guaranteed — or they’ll give you $1,000 cash. Ask any other lender if they can do that. Get home smarter, faster, better. Terms and conditions apply.