A major and complicated aspect of the mortgage process could be the process of figuring out all the different types of mortgage lenders who deal with refinancing and home loans. Direct lenders include mortgage brokers, retail lenders, and portfolio lenders, as well as wholesale lenders, correspondent lenders, and a variety of others.
Many people simply jump into the process and search for what seems to be fair terms without pondering the type the lender that they’re working. However, if you wish to ensure you’re getting the most favorable deal, you are seeking a large loan, or have any other issues to be addressed, understanding the various types of lenders that are involved is an enormous help.
A brief explanation of some of the major types is listed below. They’re not all in any way exclusive. There is a lot of overlap between the different types. For instance, many portfolio lenders are direct lenders too. A lot of loan providers are involved with more than one kind of lending, such as one large bank with both retail and wholesale lending capabilities.
Mortgage Lenders vs. Mortgage Brokers
The best place to begin is to understand the distinction between mortgage brokers and mortgage lenders.
The mortgage lenders are, in essence, they are the lenders that lend and offer the funds needed to purchase the home and refinance existing loans. They have certain criteria that you must be able to meet regarding creditworthiness and financial resources to be eligible for loans and they determine the mortgage interest rates and other loan conditions accordingly.
Mortgage brokers On the other hand don’t actually offer loans. They deal with several lenders to identify the one who can give you the highest rates and conditions. When you get the loan, you are taking out a loan from the lender and not the broker who acts only as an agent.
In most cases, they’re wholesale lending institutions (see below) that offer lower rates they provide through brokers in comparison to the rates they would charge in the event you approached the lender directly, as a retail client. But, the broker adds on their own fees, which could be more than the discount, and where the client typically saves money is through getting the best offer compared with other lending institutions.
Wholesale and Retail Lenders
Wholesale lenders refer to banks and other institutions that do not work directly with consumers but provide loans to third parties like credit unions, mortgage brokers, or other banks. They are typically big banks, but they also have retail divisions that interact with customers directly. A lot of large banks, including Bank of America and Wells Fargo, have retail and wholesale businesses.
In this kind of lending, it is the lender who wholesales the one who actually makes the loan. The name of the wholesale lender is usually on loan documents. The third-party, such as a bank or credit union, or mortgage broker in many instances, is serving as an agent for an amount.
Retail lenders are precisely what they sound like: lenders who offer loans directly to individuals. They could lend their own money, or can be an agent for another. retail lending might be a service that is offered by a larger institution. They may also offer institutional, commercial, and wholesale lending and a variety of other financial services.
Similar to wholesale lenders are warehouse lenders. The major difference is that instead of providing loans via intermediaries, they loan money to banks and other mortgage lenders to make loans on their own at their own conditions. The warehouse lender gets repaid after the mortgage loan is sold to investors.
Another difference is between mortgage lenders and portfolio bankers. The majority of U.S. mortgage lenders are mortgage bankers. They don’t offer loans with their personal funds, instead, they instead borrow money at short-term rates from warehouse lenders (see earlier) to pay for mortgages they offer. After the mortgage is approved they then transfer it over to investors and then repay the note in a short time. These mortgages are typically offered via Fannie Mae and Freddie Mac which allow these organizations to set the minimum underwriting requirements for the majority of mortgages issued by the United States.
Portfolio lenders However, they utilize their own funds to make home loans which they usually keep in their own books called a “portfolio.” Since they aren’t required to meet the needs of investors outside their portfolio they are able to set their own conditions for loans they make.
Portfolio lenders are the ideal option when it comes to “niche” borrowers who don’t meet the standard lender profile, for example, perhaps they’re looking for an enormous loan, and are thinking of acquiring the purchase of a property that is unique with a bad credit history, however, have strong financials or might be contemplating investing in a property. There are more for this type of loan however, not always. because portfolio lenders tend to be extremely cautious about who they lend money to, and their rates can be very low.
Hard Money Lenders
If you aren’t able to qualify for the portfolio lender A hard money lender might be the last choice. Hard money lenders are likely to be private individuals who have funds to lend, although they can be established as business ventures. They typically have interest rates that are very high 12 percent isn’t common – and down payments can be as high as 30% and more. The hard money lender is generally employed for short-term loans that will be paid back in a short period of time, for instance, the purchase of investment properties, not long-term amortizing loans to finance homes.
Another term that you could come across could be “direct lender.” A direct lender is a lender who originates its own loans – whether through the funds it owns or borrowing funds. It could therefore be a portfolio or mortgage lender. It cannot, therefore serve as an agent of wholesale lenders. Direct lenders are, in all likelihood, retail lenders too since they don’t require intermediaries or third parties in granting loans to customers.
The final word you might be hearing could be “correspondent lender.” While some kinds of lenders are identified by the procedure that leads to the loan the correspondent lender is defined by the way they operate following the loan’s issuance. They work with an investor, also known as a sponsor, who acquires any mortgages they purchase that meet certain requirements. It is usually Fannie Mae or Freddie Mac as the main U.S. second-tier lenders.
Correspondent lenders earn money by earning one or two points when the mortgage is granted. The moment they sell the loan to a sponsor nearly assures that they will earn a profit because the lender does not have to take on the risk of default. However, the lender can reject the loan if the deal does not satisfy the standards of the sponsor and in that case, the lender must locate a new investor or take on the loan themselves.
However, these terms aren’t necessarily specific, but rather refer to different mortgage-related functions that different lenders can perform simultaneously. Understanding what each one does can be very helpful in understanding how the mortgage process operates and provide a foundation to evaluate mortgage deals.