Not all lenders are created equal! Find out how to secure the best home loan to fit your needs.
If you are thinking about buying a new home, one of the first steps is to establish your price range. The best way to determine your home buying power is to speak with a lender or mortgage banker/broker. S/he will ask you for information to determine your debt to income ratio (DTI). You will need to provide tax returns, W2s, pay stubs, and bank statements, and they will also need to obtain your credit score. There are usually no up-front fees for loan pre-approval, other than possibly a nominal charge for the credit check.
When shopping for loans, it is important to do just that – shop! Not all lenders are created equal, and comparing rates and programs from different lenders will help you secure a loan with terms that meet your needs. Read below to learn about a few types of lenders available for mortgage loans.
Banks are local “brick and mortar” financial institutions that offer mortgages as well as traditional bank services, such as checking and savings accounts. The law requires that banks use a percentage of their deposits for lending purposes. Interest earned from loans allows a bank to lend money for many types of loans including auto loans, personal loans, and mortgage loans.
Many homebuyers will go to their regular banking institution to secure a mortgage loan, in part due to trust and loyalty. Large banks are happy to provide traditional loans, but tend to be very conservative with their lending practices. It is important to know that bank mortgage advisors are often not familiar with all the possible mortgage lending options and do not have the lending flexibility of a mortgage banker or broker. This is in part because bank employed mortgage advisors are not required to attain a federal mortgage license and are usually limited to the mortgage products their bank sells.
Mortgage bankers concentrate solely on securing loans for mortgages. They are federally licensed and should be able to offer a wide range of home loans and lending programs. They typically employ in-house underwriters, which can accelerate the loan process.
The vast majority of California mortgage lenders are mortgage bankers. They do not lend their own money but borrow funds at short-term rates and then sell the loans to investors. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most mortgages.
A mortgage broker does not make loans. Instead, they work with multiple mortgage lenders to find one that will offer you the best rate and terms. Mortgage brokers are often able to secure discounted rates from lenders compared to what you would get if you approached the lender directly as a retail customer. However, the mortgage broker will also tack on their own fee.
Wholesale and Warehouse Mortgage Lenders
Wholesale lenders are banks and other institutions that do not deal directly with consumers, and warehouse lenders provide short term financing to other mortgage lenders to originate their own mortgages. Mortgage brokers and bankers often work with wholesale and warehouse mortgage lenders to secure discounted rates for your home loan.
Portfolio Mortgage Lender
Portfolio mortgage lenders originate and fund their own loans, and may service them for the entire life of the loan. Because they typically offer deposit accounts to consumers, they are able to hold the loans they fund without selling them to the secondary market. They are also able to offer more flexibility in their loan products and loan programs because they don’t need to adhere to the guidelines of secondary market buyers.
This makes portfolio lenders a good choice for borrowers looking for creative financing. A portfolio lender might help if you are seeking a jumbo loan, considering a unique property, have flawed credit but strong finances, or even looking at investment property.
Subprime Mortgage Lender
Subprime lenders help to secure loans for people with poor credit. The definition of a subprime loan varies from lender to lender, but is generally a borrower with a credit score less than 620. Other issues may affect their debt to income ration (DTI) such as limited income. As a result, interest rates provided by subprime mortgage lenders tend to be higher than standard lenders because of the increased risk.
Hard Money Lender
If you can’t qualify with a portfolio lender, you may try a hard money lender. They tend to be private individuals, though they may be set up as a business operation. Interest rates for hard money loans are usually quite high and require a large down payment. Hard money lenders are typically used by investors for short term loans.
How to Find a Mortgage Lender
Unless you regularly deal in real estate, you might not have any mortgage lenders in your contact list, other than your local bank. Contact your local licensed California real estate agent for a mortgage lender referral. Most real estate agents will have several lender contacts and will help you find one that is the right fit for your situation.