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By: Yara Zakharia, Esq.
A mortgage lender is the mortgage company or bank that offers home loans. A borrower who is shopping for a mortgage loan has a choice among eight categories of primary mortgage lenders:
1) Mortgage Banker:
A mortgage banker is an individual or lending organization which typically originates loans and/or services mortgage loans. Shortly after funding, a mortgage banker sells the mortgages to the second mortgage market. Sometimes, companies that have a relationship with the mortgage banker provide the actual loan funding. The sale of the mortgage by the mortgage banker does not terminate the relationship between borrowers and the lender, since a mortgage banker may or may not sell the servicing of the loan. The mortgage banker may elect to continue to service the loan. A mortgage banker will educate the borrower on the main benefits and features of different mortgages and help them select the one that best suits their financial objectives. Prospective borrowers will often find that a mortgage banker offers attractive loan rates and programs.
2) Portfolio Lender:
A portfolio lender is an organization which provides loans with its own funds for home mortgages, but which then keeps the loan on the organization's books. In other words, instead of selling the loans to the secondary mortgage market, it retains some or all of mortgages for investment portfolio purposes. A portfolio lender is not bound by the Fannie Mae/Freddie Mac guidelines. Once a portfolio loan has reached the one-year mark and is without any late payments, it is deemed seasoned and may be sold to the secondary mortgage market, notwithstanding the fact that it does not satisfy those guidelines. When selling some of its mortgage portfolio on the secondary market, the portfolio lender becomes in essence a mortgage banker and oftentimes continues to service the loan.
3) Direct Lender:
A direct lender is a mortgage lender which makes loans in its own name, even though the funds for those loans might originate from lines of credit established with other lending organizations. Direct lenders usually assume the role of either a mortgage banker or portfolio lender.
4) Correspondent Lender:
A correspondent lender is an institution which has the capacity to authorize loans on behalf of a mortgage lender. This type of mortgage lender acts as the agent of one or several lenders (or "sponsors" who usually underwrite the loan) during the origination and closing. The correspondent lender may also service the loan for the lender. A correspondent lender is often times a mortgage broker which has formed close ties with mortgage lenders. The correspondent lender differs from mortgage brokers and other lenders in that they tend to individually sell the mortgages which they arrange as opposed to grouping them with other mortgages for resale.
5) Mortgage Broker:
A mortgage broker is an individual or institution that acts as an intermediary between borrowers and lenders by arranging financing for the former through mortgage brokers, portfolio lenders or another source. The mortgage broker matches lenders with borrowers who satisfy the lenders' criteria. Mortgage brokers have access to a number of lenders and often provide a wide range of loan programs.
A mortgage broker helps borrowers complete the following tasks:
- fill out loan applications,
- obtain the appraisal and credit report,
- choose a loan program, and
- locate a lender to fund the loan
Generally speaking, this type of mortgage lender does not decide whether or not to extend the loan and does not fund the loan. From the borrower's standpoint, the mortgage broker's role is more advice-laden than from the perspective of a mortgage banker or other lender.
Either the borrower or the lender pays the mortgage broker and compensation is usually incorporated into the closing costs as either points or fees. There are two factors that borrowers should consider in utilizing this type of mortgage lender:
- That borrowers will pay more in interest rates and fees, and
- That when paid by the mortgage lender, mortgage brokers cannot claim to be truly independent.
6) Wholesale Lender:
A wholesale lender is an organization which underwrites and funds mortgage loans. It may also ensure a loan's compliance with underwriting guidelines and service the loan.
A wholesale lender is not involved in the retail end of the market; therefore, it does not deal directly with borrowers. Rather, this kind of mortgage lender always deals with a third party such as a mortgage broker. A wholesale lender can be either a portfolio lender (by keeping some or all of its mortgages) or a mortgage banker (by on-selling its mortgages).
7) Online Mortgage Lender:
An online mortgage lender is a lending institution that utilizes the internet to complete a significant portion of the mortgage process for the borrower. This type of mortgage lender offers borrowers the following advantages over the traditional process:
- the ability to apply for loans via their home computers,
- the absence of paperwork
- the elimination of "middleman" steps
- a quicker and simpler process
- instant real-time quotes and comparisons
- online tools and valuable resources to research their options
- the acceleration of the application through online pre-qualification
- personal consultation with a mortgage banker
8) Sub-Prime Mortgage Lender:
A sub-prime mortgage lender issues loans to those who do not qualify for loans from mainstream lenders. Some are independent; however, they are increasingly becoming affiliates of mainstream lenders. This type of mortgage lender will rarely identify itself by this appellation. Borrowers can recognize sub-prime mortgage lenders by their prices, which are typically higher than those quoted by mainstream lenders. It is advisable for borrowers to steer clear of this category of mortgage lender if they can qualify for mainstream financing.
Finding and obtaining the right mortgage is not that easy. It involves a number of critical steps, the first and most important of which is locating the right mortgage lender. The eight types of mortgage lenders outlined above constitute quite a diverse group; each one with its own functions and advantages to offer to prospective borrowers.
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