The mortgage lender is an important figure in the home-buying process. These lending institutions are responsible for providing the funds that enable individuals or families to purchase their homes. There are various types of mortgage lenders to consider when choosing a home loan and each has its unique advantages and disadvantages.
Mortgage lenders can be broadly categorized into two groups: banks or credit unions and non-depository lenders. Banks and credit unions have been around for centuries, and they provide a wide range of financial services such as checking accounts, savings accounts, personal loans, and mortgages. They are often large institutions with significant financial backing, offering a wide range of product offerings to their customers. The advantage of working with a bank or credit union is the perceived security that comes with the institution. The security that comes with applying for a mortgage from a well-established financial institution is preferred by some as it conveys stability, integrity and lets buyers trust the process.
On the other hand, non-depository lenders, also known as non-bank lenders, are financial institutions that provide mortgage services but do not hold funds in customer accounts or take deposits. They do not have banking licenses or offer the range of services that banks and credit unions offer. They specialize in providing mortgages, and they often have fewer restrictions than banks. They can process loans faster, and they may have more flexibility in their underwriting guidelines. Non-depository lenders may offer loans that are more specialized or creative than traditional bank or credit union loans.
Different mortgage lenders have different features, advantages, and disadvantages, and buyers should determine which option best suits their financial situation and home-buying goals. There are three main types of lenders for those in the market for a mortgage: retail, correspondent, and wholesale lenders.
Retail lenders are the most common type of lender. The retail process begins when the borrower contacts a loan officer at a bank, credit union or non-depository lender to start the loan application process. The loan officer reviews the borrower’s financial situation and then determines the types of loans available to that borrower. Retail lenders directly provide the loan to the borrower and hire other companies to help facilitate the application process for the borrower. The banks or credit unions involved in this type of lending may keep the loans on their books or sell them to other institutions by servicing.
Correspondent lenders are similar to retail lenders, but they do not provide loans directly. Rather, they work behind the scenes and serve as middlemen between retail lenders and investors. Correspondent lenders buy loans from various lenders and often package them together as a mortgage-backed security to sell to a third party. Alternatively, they can sell the mortgages to other entities that will fund the mortgage. While their work happens behind the scenes, correspondent lenders are valuable in ensuring funding is available for mortgages.
Wholesale lenders work exclusively with brokers, who connect buyers with mortgage lenders. Wholesale lenders provide loans to mortgage brokers at lower rates and also provide wholesale fees (referred to as “points”), which the brokers then add to the final rate charged to the borrower. As such, wholesale lenders have a more significant impact on the final interest rate on a borrower’s mortgage. Borrowers can often access more loan options and the ability to negotiate better rates and fees by working with a broker in conjunction with this type of lender. Retail lenders can work with brokers, but wholesale lenders focus solely on working through these intermediaries. Remember, “brokers are better!”
While there are many choices when it comes to mortgage lenders, the choice of the lender often comes down to the borrower’s specific needs, personal preferences, and financial situation.
When searching for a mortgage lender, borrowers should consider the interest rates and fees that come with each lender. These costs among other factors like down payment requirements and how the interest rates change over time, vary between lenders. Interest rates are often the most significant determining factor, but borrowers should also be aware of any prepayment penalties, the terms of the loan, closing costs, and any additional fees.
Borrowers should also be aware of the lender’s reputation for customer service, local support, and other perks that may set a lender apart from the others. The amount of personal attention and support provided by a lender is key during the homebuying process.
The choice of the mortgage lender is a critical decision for every homebuyer. Whether a borrower opts for a bank, credit union, or non-depository lender, there are different types of mortgage lenders to choose from, each with its unique set of advantages and challenges. A buyer must learn about them, and work with their real estate agent or mortgage expert to find the best mortgage lender that suits their financial situation and home buying goals.
