Understanding the Types of Mortgage Lenders

Traditional lenders, mortgage brokers, correspondent lenders; who do you turn to when you need a mortgage? After reading this article, you’ll know the answer.

Traditional Lenders

Let’s start by taking a closer look at mortgage lenders. Commercial banks, mortgage lenders, credit unions, and thrift institutions, also known as savings and loan institutions, are the traditional players in the mortgage market. Except for mortgage lenders, the funds available to loan come from the money that’s been deposited by customers into certificates of deposit, and savings and checking accounts. Approved mortgage loans are either maintained in a portfolio or sold to investors in the secondary market.

Mortgage lenders on the other hand, raise capital from selling to the secondary market mortgage loans shortly after they’re closed. They don’t, however, always sell the servicing of those loans. Since mortgages are their only business, borrowers can typically find great deals and favorable rates when dealing with mortgage lenders.

Mortgage Brokers

The job of a mortgage broker is to match borrowers with mortgage lenders. In return for the services brokers provide, they’re paid a fee. Brokers can either work for the borrower or the lender. When teamed with a borrower, brokers assist in completing mortgage applications and choosing mortgage products. Their knowledge of the various lenders facilitates the matching of borrowers with suitable lenders. In the event a borrower’s application is denied, a mortgage broker usually can quickly resubmit the application package to another lender. That saves time and often, it also saves the deal. These services are why brokers generate approximately half of all mortgages. Some of these are processed and closed in the broker’s name.

It’s important to note that a mortgage broker is different from a mortgage lender in two key ways. First, a broker doesn’t decide whether or not an applicant’s loan gets approved. Second, the broker does not lend funds. Borrowers should understand this before entering into a broker arrangement. If you decide to work with a broker you won’t usually pay a higher rate. In fact, there’s a chance you may get a better rate because a good broker is a good negotiator who knows how to shop a loan.

Something else to know is that mortgage lenders make available different rates depending on whether they’re dealing with a broker or directly with a borrower. Brokers are typically quoted the lender’s lower wholesale rates whereas a borrower is typically quoted retail rates. Brokers add points to the rates they’re quoted and usually they’re in line with the prevailing retail rates. Since a broker works independently that broker can charge whatever rates he or she wants. Ideally you want a broker that charges a fair markup, is aggressive, offers exceptional customer service, and works with a vast network of lenders.

Correspondent Lenders

Correspondent lenders are the new-comers to the mortgage lending market. The easiest way to explain their purpose is as a hybrid of a mortgage lender and a mortgage broker. Like the mortgage lender, correspondent lenders have the ability to determine whether to approve a loan. And like the mortgage lender, correspondent lenders fund mortgages. Funding come from its credit lines or its own money. However, once the correspondent lender closes a mortgage, it is sold right away to another lender with which it has an established business relationship. The sale price is pre-negotiated. Working with a correspondent lender benefits borrowers two ways. First, borrowers deal directly with the institution offering the funding. And second, its established network enables the correspondent lender to shop around in search of the lowest interest rate.

When you’re in the market for a mortgage, you need to know who you’re dealing with. Whether the individual is acting as a broker or working for a lender isn’t always obvious. To make matters more confusing, some financial instructions work as both brokers and lenders depending on the state in which they’re operating. So ask before becoming involved. Also ask how long the person or institution has been in the mortgage business. And always check into the broker or institution’s background before becoming involved. You don’t want to end up working with a mortgage specialist that has a history of complaints on file with state and/or federal regulators. A great source for checking complaints is the Better Business Bureau. It’s free and it’s online so use it.