Many home buyers don't plan on shopping around for a mortgage. Often they have an existing relationship with a financial institution and they erroneously believe that that will get them the best cost and the best service. We always encourage buyers to shop around - not only because they might find a lower cost deal (lower fees and lower rates) but also because we are concerned that the wrong lender will screw up the transaction. Frankly, our experience with lenders with which buyers have existing relationships has not been good and, obviously, we only recommend lenders with which we have had good experiences (and, no, we don't get paid for referrals). If you want your closing to go smoothly and occur on time you need the right players on your side. Mortgage lenders are sort of like real estate agents - just because they have the business card doesn't mean they are competent.
Consequently, I asked Russell Martin, of Perl Mortgage, to guest post today so that he could provide a mortgage professional's perspective on the different types of lenders available.
The Different Types of Mortgage Lenders
Consumers are often confused as to the various types of mortgage lenders available to them. It is extremely important that you know whom you are dealing with when it comes to your largest financial transaction.
Often confused with the other lenders, mortgage brokers do not actually lend their own money. Mortgage brokers arrange financing from relationships with a number of different banks. The mortgage broker will provide counsel on the types of loans you will qualify for and will guide you through the loan process. However, the mortgage broker does not actually approve the loan, nor do they actually fund the mortgage.
The advantage of a mortgage broker is that they have very low overhead and work with multiple lenders, so on average they tend to offer lower mortgage rates than large mortgage banks. Mortgage brokers obtain interest rates on a wholesale basis from mortgage banks. In addition, some of the best mortgage originators tend to work for brokers. However, the disadvantage of a mortgage broker is that there are a lot of bad ones due to low barriers to entry into the industry.
Most mortgage brokers tend to be small Mom & Pop type businesses. Many may have very strong brand names in their local market, but rarely any kind of national brand recognition. However, with the recent crisis in the financial markets, mortgage brokers are seeing their numbers dwindle dramatically as most are not large enough and financially stable enough to make it through these tough times. In addition, tougher regulations have also made it very difficult for mortgage brokers to continue to be as competitive as other channels.
A direct lender is a mortgage company that has the ability to underwrite and fund their own mortgages. Typically, after the loan is funded, the lender then sells the loan to a larger mortgage bank or institution. In fact, a large number of direct lenders still shop multiple banks like mortgage brokers, but they retain the ability to underwrite the loan and fund it so they don't lose control of the transaction like a pure mortgage broker.
The advantage of a direct lender is that they can be like a mortgage broker, but they tend to be larger more stable companies and have more control over the transaction. The disadvantage is that some direct lenders can be bloated and may not pass savings on to consumers. Many well known mortgage lenders such as Quicken Loans, E-Loan, etc are examples of large national direct lenders. Locally, Perl Mortgage is a direct lender. Direct lenders often times will refer to themselves as "mortgage banks" because they are actually writing the check for the mortgage, however, this can be a little misleading as they aren't really banks in that they don't take deposits from consumers.
A true mortgage bank is also known as a depository institution. In other words, these banks use the deposits from its customers to make other loans such as mortgages. True mortgage banks are the large retail banks you find on your local corner - Wells Fargo, Bank of America, Citibank, etc.
The advantage of these banks is that they have brand recognition. Since Mortgage banks are the source of funds, they also underwrite and fund the loans. The disadvantage is that they are large institutions and they also only offer one mortgage product that may or may not be the best for you or the most competitive. In addition, big banks are not known to have the most knowledgeable loan officers and you may be dealing with a call center.
Regardless of which type of lender you use to get your mortgage, it is important that you spend a lot of time vetting the individual loan officer. Mortgage may be a commodity, but the loan officer is not. Ninety percent of your experience will be driven by the individual loan officer who can make all the difference in the world in this market where underwriting guidelines are constantly changing.
Residential Mortgage Advisor