Content of the material
- Mortgage Lenders vs. Mortgage Brokers
- How a bank mortgage works
- How to choose a mortgage lender
- Direct Lender
- Private Lender vs Bank: Benefits of a Private Lender
- Fewer Regulations
- Customized Loans
- Easier Approval
- Faster Approval
- Fully Licensed
- Why Choose a Private Lender Instead of a Bank?
- A Best-of-Both-Worlds Option
- Mortgage broker vs. bank
- What Is a Mortgage Broker?
- What does a mortgage broker do?
- What doesn’t a mortgage broker do?
- Is a mortgage broker expensive?
- How to Find a Direct Lender
- Correspondent Lenders
Mortgage Lenders vs. Mortgage Brokers
A good place to start is with the difference between mortgage lenders and mortgage brokers.
Mortgage lenders are exactly that, the lenders that actually make the loan and provide the money used to buy a home or refinance an existing mortgage. They have certain criteria you have to meet in terms of creditworthiness and financial resources in order to qualify for a loan, and set their mortgage interest rates and other loan terms accordingly.
Mortgage brokers, on the other hand, don’t actually make loans. What they do is work with multiple lenders to find the one that will offer you the best rate and terms. When you take out the loan, you’re borrowing from the lender, not the broker, who simply acts as an agent.
Often, these are wholesale lenders (see below) who discount the rates they offer through brokers compared to what you’d get if you approached them directly as a retail customer. However, the broker then tacks on his or her own fee, which may equal the discount – where the customer usually saves money is by getting the best deal relative to other lenders.
How a bank mortgage works
A bank mortgage is a home loan you borrow directly from a bank or financial institution. Often, banks have just a few home loan options with specific eligibility requirements for each type. A bank may have more strict credit requirements and less flexibility when working with borrowers in atypical situations than a lender that only offers mortgages.
How to choose a mortgage lender
No matter which type of lender you choose, make sure you feel good about offering the institution your business. If a company has good reviews, a solid track record and high ratings, it’s more likely you’ll have a good experience with it. Make sure to do your research, read all the reviews you can and talk to real people you know who can share their experiences.
Ultimately, you want a lender that’s transparent, offers reasonable rates and doesn’t have a history of poor service or reviews.
A direct lender is a financial institution or private entity that actually provides the loan for a mortgage. Direct lenders may be banks and other financial institutions. Some direct lenders are private companies that deal specifically with financing mortgage loans for the general public—many of which operate online. For instance, borrowers that use lenders like Quicken Loans and Loan Direct can complete and get their approvals online.
Many borrowers choose to go with a lender with whom they’ve already done business. Having a long-standing relationship may help secure a better—or bigger—loan amount, not to mention a better interest rate. The process of applying for a mortgage through a direct lender is the same as it is with a mortgage broker: providing documentation, filling out the application, and waiting for approval. A mortgage calculator can show you the impact of a better interest rate on your monthly payment.
Consumers cut out the middleman by going to a direct lender. Doing so may also make the loan process faster. Since the lender deals directly with the consumer, the two can communicate effectively with one another rather than having to rely on someone else to relay messages back and forth. So, if a consumer has any questions during the application and/or approval process, they can go directly to the lender.
The goal is to find the direct lender with the best rate and have a backup if the first choice doesn’t come through. But there is a pitfall to choosing a direct lender. Skipping a mortgage broker may mean going through the application process with more than one direct lender. Shopping around like this can be tedious and time-consuming. It can also mean taking a hit to your credit score if you’re applying with multiple lenders within a short period of time.
Private Lender vs Bank: Benefits of a Private Lender
There are lots of reasons to work with a private lender instead of a traditional bank, especially if you run a real estate investment entity and are applying for a business purpose loan. The following are some of the most noteworthy advantages to keep in mind:
Private lenders are often less regulated than banks.
Banks have to meet a variety of state and federal regulations, as well as regulations put in place by agencies like Fannie Mae and Freddie Mac. These regulations put limits on the types of businesses and individuals the bank can lend to, as well as what the borrower profiles can look like.
Private lenders still have to abide by state and federal laws and regulations. However, they have more freedom and flexibility compared to traditional banks.
Because private lenders have more freedom and flexibility, it’s also easier for them to customize loans to different borrowers. They can tailor your loan to your specific business credit score, your debt-to-income ratio, and your loan-to-value ratio.
These customization options help them to create a unique loan that works for you and helps you get the amount of money and specific loan terms that you want.
Thanks to the customization options available to private lenders, it’s often easier to get approved for a loan through them than it is to get approved by a traditional bank.
Private lenders can make more adjustments and tailor your loan to you and the rental or investment property you’re hoping to buy. They’re not beholden to as many rules and restrictions that could disqualify you from getting approved by a traditional lender.
Private lenders are especially helpful to new entities and those that don’t have a lot of credit. They’re used to working with people who have unique circumstances, and they’re often more willing to look beyond the roadblocks that can cause your application to be denied.
Not only is it easier to get approved, but the approval process is usually faster. When you work with a private lender, you can get approved very quickly since they don’t have to jump through as many hoops.
If you’re looking to get approved for a business purpose loan so you can buy a new rental property right away, a private lender is definitely the way to go.
It’s worth noting that private lenders are fully licensed to do business in their specific states, too. There are plenty of reputable lenders who can answer your questions and help you get approved for a loan as quickly as possible.
Why Choose a Private Lender Instead of a Bank?
Banks can be much more difficult to deal with than a private lender.
For starters, a private home mortgage lender like Financial Concepts Mortgage offers greater flexibility than most traditional banks. While private lenders still have to conform to many of the same usury rules that a traditional bank does, private lending institutions are less strictly regulated than banks. This allows them to structure many different types of loans that will match the buyer’s precise financial situation to their home ownership goals.
Obtaining a mortgage loan through a private lender is typically a much faster and easier process than obtaining one from a bank. Banks have to conform to multiple potential entities like Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development (HUD), or the Veterans Administration (VA), which have very strict regulations on who is an acceptable candidate for a loan. There are mountains of paperwork, dozens of forms to sign, and many documents to compile and submit, sometimes over several weeks, as part of the regular bank mortgage application process. When you get a mortgage from a bank, they punch in a lot of data and then a computer decides whether or not you are an acceptable credit risk. There is little to no discretion to move away from those standards and requirements.
Private lenders take a more customizable and tailored approach to lending. For example, a private lender might be able to overlook flaws from your past that appear in your credit history and consider factors much more current, such as your debt-to-income ratio. They evaluate the loan you are interested in getting and consider whether or not it’s reasonable for your income. If the risk seems slightly higher, they can often still extend you a loan that a traditional bank wouldn’t, at a slightly higher interest rate to make the private lender’s investors feel more comfortable with the institution taking that risk.
A Best-of-Both-Worlds Option
The majority of mortgages are sold by designated mortgage lenders and banks, but other options exist that are sometimes hybrids between the two. You might consider a financial technology firm, as well as a credit union, savings and loan association, or a smaller financial institution.
Mortgage loans can come from numerous sources. They're not limited to banks and mortgage lenders. Stock brokerages and private individuals can also provide home loans.
You might also consider seller-financing for your home purchase, where the home’s seller agrees to let you purchase the property over time, via monthly installments. These types of loans typically come with higher interest rates due to the bigger risk they pose to the seller, however.
Mortgage broker vs. bank
In general, if your loan is a straightforward transaction, and your credit history, income, and assets are strong, you may be able to save time and money with a bank.
“This is typically true for conventional conforming deals,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “Banks only have their jumbo options available, and these rates often differ from lender to lender, much more so than conforming rates.”
If your mortgage application involves challenges, a broker who knows which lenders are most flexible can help.
For instance, a broker might be best if your FICO score is 580 and you have a sparse credit report because you’d be right on the borderline of qualifying for an FHA loan. A good broker would know which lenders are lenient on credit scores and more likely to approve your loan application.
That said, many brokers today offer competitive pricing in line with that of direct lenders. And many banks today have a larger variety of loan programs.
Look for portfolio lenders if you need something really creative. (These are banks and lenders that service their own loans in-house, rather than selling them to end-investors on the secondary market.)
What Is a Mortgage Broker?
Mortgage brokers work with several different lenders and banks to match you with a loan that meets your needs. You can think of brokers as the middlemen between you and the lender.
What does a mortgage broker do?
A mortgage broker is basically the middleman between you and a mortgage lender. They look over your loan application and say, “Hey buddy, it looks like you can afford this much mortgage. I’ll find you a good lender.”
You shake hands and they go to a group of lenders and say, “Hey folks, look here. My buddy can take out this much mortgage. Who’s got the best deal?”
A lender raises their hand, and the broker brings them to you, takes your money, and says, “Hey, look! It’s a perfect fit!”
And that’s about it.
What doesn’t a mortgage broker do?
Now, keep this in mind: A mortgage broker doesn’t actually approve your mortgage. That’s the job of the lender. All a broker does is connect you to a mortgage lender or bank.
Is a mortgage broker expensive?
A mortgage broker isn’t cheap. You’ll pay them 1–2% of your total mortgage.(1) And more often than not, a broker would love to lock you into a bigger mortgage, even if you can’t afford it. Why? The bigger the loan they convince you to take out, the more compensation they get from the lender.
So are they worth the extra cost?
Some people like mortgage brokers because they do the mortgage shopping for you. But here’s something you should know: A lot of lenders don’t work with brokers. So when a broker says they’re giving you a good deal, what they mean is that they’re giving you the best deal out of the pool of lenders they work with.
That pool can be big. Or it can be small. The bottom line is: You may miss out on a better deal with a lender simply because your broker doesn’t work with them.
How to Find a Direct Lender
Investopedia’s best overall pick for direct mortgage lenders is Quicken Loans, better known as Rocket Mortgage. For those looking for a more modernized process, Better.com uses software that links to popular banks and tax prep software like TurboTax so you don’t have to track down tax returns and statements to upload. If you prefer to work with someone local over a national company, then your local bank or credit union is a great place to start.
A final term you may hear is “correspondent lender.” Whereas some types of lenders are distinguished by the process leading up to the loan, correspondent lenders are defined by what happens after the loan is issued. Correspondent lenders work with an investor, called a sponsor, who purchases any mortgages they make that meet certain criteria. Often, this is either Fannie Mae or Freddie Mac, in their roles as the major U.S. secondary lenders.
Correspondent lenders earn their money by collecting a point or two when the mortgage is issued. Immediately selling the loan to a sponsor pretty much guarantees they’ll make money, since the correspondent no longer carries the risk for a default. However, the sponsor may decline the loan if it turns out not to meet the sponsor’s standards, in which case the correspondent must either find another investor or carry the loan itself.
Again, these terms are not always exclusive, but instead generally describe types of mortgage functions that various lenders may perform, sometimes at the same time. But understanding what each of these does can be a great help in understanding how the mortgage process works and form a basis for evaluating mortgage offers.