Loan Advice For Homebuyers

Some Considerations About Loans

As a prospective homebuyer, securing financing is a crucial step of the process.  There are various institutions that will work with you to make the most of your financial situation, however, one of the most important parts of the process is finding the right loan officer.  Loan officers have two functions: they advocate for you to get the loan approved, and they need to give you a quality loan.  Be sure to ask for references when looking for a loan officer (your realtor will have recommendations). Be sure to look for someone who has a reputation for being reliable and service-oriented.

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.

The Difference Between The Various Lending Institutions

There are many options available if you are looking for institutions that will lend you money to purchase your new home.  These institutions include banks, savings and loans associations, mortgage bankers, and mortgage brokers.

Banks

One of the benefits of securing financing from a bank is   flexibility.  Most mortgage bankers have wholesale lending divisions. They vary in size, but can tailor a loan package specifically to your needs.  A mortgage banker can originate loans and sell directly to jumbo loan investors such as Fannie Mae, Freddie Mac, and Ginnie Mae, among others.  Some will service the loans they originate, but not all of them do this.  Banks come in all different sizes and most have wholesale lending divisions.

Savings and Loans Associations

Savings and loan associations are financial institutions specializing in savings deposits and giving loans for mortgages. Similar to banks, they take in and pay interest on deposits from individuals who hold savings accounts.  They then lend the money out to borrowers, and collect interest on it.  Savings and loans are typically mutually held, although if a savings and loan is publicly traded, then it is no longer considered an association and the borrowers and depositors have no managerial control.  A recent change in the law now allows these institutions to be called banks or savings banks.

Mortgage Brokers

Mortgage brokers bring together borrowers and lenders for the purpose of loan origination.  Once originated, they then broker them to wholesale lending institutions.  A good broker has many established relationships with these companies.  As opposed to bankers, brokers do not fund the loans, but instead work on behalf of several lenders.  Brokers are compensated through fees or commission, and typically work with lending institutions that have a wholesale loan department.

Mortgage Companies

Mortgage companies are the most popular source for mortgage loans.  Once a loan is taken out they sell it to investors, secondary market agencies and other lenders.  As the borrower, it doesn’t matter to you whether the loan is held or sold.  In fact, typically a borrower won’t notice any difference as the original mortgage company continues to collect and manage the escrow account.

Other Terms To Know

Wholesale Lenders, Mortgage bankers, and portfolio lenders also act as wholesale lenders and work mainly with brokers for loan origination.  These wholesale lenders lend to mortgage brokers at a lower cost than they can get from their retail branches, thus receiving a larger profit after they sell them to the general public.   The broker then adds on his fee.  For you, the borrower, the cost of your loan is basically the same as if you had gotten the loan from any retail branch of the wholesale lender.

Portfolio Lenders

If an institution lends its own money and originates loans for itself, it is called a portfolio lender.  Typically larger banks, and savings and loans fall under this category.  The term portfolio refers to their portfolio of loans that they are lending for and are not concerned about being able to sell these loans on the secondary market.  It is for this reason that they do not have to follow the Fannie/Freddy guidelines and can determine on their own credit worthiness.

Often, portfolio lenders also offer fixed rate loans or government loans.  In these cases they are also involved in mortgage banking.

If you borrow from a portfolio lender, know that once you have made payments for a year without any late payments your loan is considered “seasoned” and can become marketable.  At this point the lender can sell your loan as part of a pool to the secondary market.  As the borrower, chances are you won’t notice any difference, as you will still make your payments to the original lender, who has now become your “servicer”.

Direct Lenders

Lenders who fund their own loans are known as direct lenders.  Direct lenders range in size and usually are mortgage bankers or portfolio lenders, but not always.  Banks and savings and loans have deposits they can use to fund loans, but they tend to use “warehouse lines of credit” to fund the loans.

In the past, you could identify a direct lender because the loan documents were drawn up in its name.  This is no longer the case as even the smallest mortgage broker can now fund loans in his name.

Correspondents

A company that originates and closes home loans in its own name, and then sells them individually to a larger lender is called a sponsor.  The sponsor then sells them to Ginnie Mae, Fannie Mac or Freddie Mac as part of a pool.