The Advantages of Different Types of
Mortgage Lenders
What kind of lender is "best?"
If you talk to a loan officer, he (or she) will probably say the lender
they work for is "the best" and give you a list of reasons why.
If you meet the same loan officer years later and he works for a
different kind of lender, he will give you a list of reasons why that
type of lender is better.
Realtors have differing opinions and, as a group, their opinions have
changed over time. In the past, most would often recommend
portfolio lenders - because they almost always closed the deal.
As time passed, mortgage bankers and mortgage brokers became more
important, and agents switched along with the changing times.
Most often a Realtor will direct you to a specific loan officer who has
demonstrated a track record of service and reliability -- or a loan
officer who works for a lender affiliated with their real estate office.
It is often more important to choose a good loan officer, not the
institution. Loan officers have two jobs. One is to be your
advocate in getting the loan approved. The other is to deliver
quality loans. You want someone who has proven dependable and
ethical in the past -- someone you can trust.
As for lending institutions, each type of lender has strengths and
weaknesses. Quality within each branch or office can vary,
depending on the loan officer, the support staff, and a variety of
other factors.
PORTFOLIO LENDERS
Portfolio lenders are usually Savings & Loan institutions, and
sometimes banks. They are called "portfolio" lenders because they
tend to originate loans for their own portfolio (usually adjustable
rate loans), not for resale in the secondary market. The
distinction gets blurred because most portfolio lenders also engage in
mortgage banking.
They will often pay more compensation to their loan officers for
originating a portfolio product than for originating a fixed rate
loan. You may also find that they are not as competitive as
mortgage bankers and brokers in the fixed rate loan market, though this
is no longer a hard and fast rule.
It is often easier to qualify for a portfolio loan, so they are often a
lender of "second resort" for those who cannot qualify for a fixed rate
loan. If a loan officer is steering you towards "sub-prime"
loans, it might be wise to check out a portfolio lender first.
Portfolio lenders also can serve as "niche" lenders because certain
things are more important to them than meeting the more standardized
underwriting guidelines of a mortgage banker. An example
would be a savings & loan which is more concerned with an
individual's savings history than being able to fully document income.
If you apply for a loan with a portfolio lender and you are declined,
that's it. You're done. If you still think you should be
able to qualify for a loan, you have to start over somewhere else.
BANKS and SAVINGS & LOANS
Their major strength is that you will recognize their name. Banks
and Savings & Loans often operate as portfolio lenders, but as the
lending world has changed, most also operate as mortgage bankers and
sometimes brokers.
MORTGAGE BANKERS
If we are talking about the larger mortgage bankers, you can count on
them having several strengths. For the biggest ones, like
Countrywide or Wells Fargo, you will recognize the "brand name."
Usually, larger mortgage bankers are much better at promoting special
first time buyer programs, cooperating with states and local
governments. These programs will have slightly lower interest
rates and costs than the current market rate. To qualify for
these programs, your income must usually fall below a median average
for the area and you must not have owned your residence for the last
three years.
Mortgage bankers may have problems just because they are "too big" or
they may operate like well oiled machines. A lot depends on the
branch or office you deal with.
If you're applying for an FHA or VA loan, sometimes mortgage bankers
are more adept at some of the intricacies involved than a mortgage
broker. For example, the tract you are buying in may not be
"approved" by FHA or VA. Mortgage bankers often have more clout
in getting it approved than would a small mortgage broker.
If your home loan is declined for some reason, many mortgage bankers
allow their loan officers to broker the loan to another
institution. However, because your loan officer is so used
to promoting his own company's product, he often loses track of the
"niches" offered by certain wholesale lenders.
MORTGAGE BROKERS
Basically, wholesale lenders use mortgage brokers as their loan
officers. They offer a lower rate to the broker, the broker adds
on his compensation, and the rate is usually about the same as you
would get using a mortgage banker. Sometimes the rate is lower,
sometimes higher, depending on how much compensation the broker adds on.
Mortgage brokers also learn the "hot points" of various wholesale
lenders and can handpick the lender for a borrower which may be unique
in some way. He will be able to submit your loan to either
a portfolio lender or a mortgage banker. Another advantage is
that, if a loan gets declined for some reason, they can simply
repackage the loan and submit it to another wholesale lender.
One additional advantage is that mortgage brokers tend to attract a
high number of the most qualified loan officers. This is not
universal, because mortgage brokers also serve as the training ground
for those just entering the business. If you have a new
loan officer and there is something unique about you or the property
you are buying, there could be a problem on the horizon that an
experienced loan officer would have anticipated.
A disadvantage is that mortgage brokers sometimes attract the greediest
loan officers, too. They may charge you more on your loan which
would then nullify the ability of the mortgage broker being able to
"shop" for the lowest rate.
WHOLESALE LENDERS
Borrowers cannot get access to the wholesale divisions of mortgage
bankers and portfolio lenders without going through a broker.
If your Realtor or builder make a suggestion for a lender, be
sure to talk to that lender. There are several reasons they make
recommendations.
One reason Realtors and builders make suggestions is because they want
to recommend someone reliable. Reliability is important to you,
so that you don't end up with a horror story to tell. Reliability
is also important to the seller, the agents, and everyone involved in
your transaction because is the deal doesn't close, everyone walks away
with nothing.
When agents and builders recommend lenders, they often develop a
certain amount of "clout" in dealing with those lenders. This can
help in a situation where you need to cut through "red tape" and get
something done quickly.
When buying a new home, dealing with a recommended lender is often very
important. This is because there are a lot of intricacies
involved in new homes that do not exist when buying resale. If
you "shop" around to find your own lender, you may end up with someone
who quotes a great rate and is great with refinances or resales, but
has no experience with new homes. This can lead to problems or
delays.
Over the last ten years, real estate companies and builders have built
up their own mortgage brokerages. "Bundled services" like this
make sense because it adds another profit center to the company.
This is useful because it helps real estate companies to offset higher
commission splits with their agents.
In the early days of "bundled services," the loan officers and staff
were often sub-par and the quality of service may not have been so
great. Things have improved since then. However, because
this is "captured business," sometimes these lenders don't have as much
incentive to offer you great deals or lower rates. All you have
to do is let them know you are "shopping rates" and they will probably
work toward accommodating you as much as possible.
Never automatically disqualify a recommended lender, but be sure to be
ask questions about any relationships between the lending company and
your builder or real estate agent's company. That will help you
be more vigilant on getting the best interest rate and the lowest costs.
CONCLUSION
Make sure to do a little shopping for yourself. By knowing the
interest rates of the market and making sure your loan officer knows
you are looking at rates from other institutions, you can use that as
leverage to make sure you are obtaining the best combination of
service and lowest rates.