How to select the right mortgage company for competitive rates.
Choosing the right mortgage company to handle your loan is much easier said than done. Mortgage companies have so many designations, “mortgage broker”, “mortgage lender”, “mortgage bank” and then there’s individual banks and local credit unions.
Begin by understanding the differences between the various mortgage companies
Some terms to familiarize yourself with…
“Broker” – A middleman that does not lend their own money.
“Lender”-actually makes the loan with their own funds.
“Origination”-act of putting together a loan for compensation
“Servicing”-collecting of monthly mortgage payments
How A Mortgage Broker Makes A Home Loan
A mortgage broker is a wholesaler. Mortgage lenders pay middlemen, otherwise known as mortgage brokers, to fund your loan with that lender. A mortgage loan brokers acts as an intermediary between the borrower and the lender, and they negotiate terms and conditions of the loan in exchange for compensation. The wholesaler (offers rates to the broker-from the broker to you) operates off of a monthly credit line, funds the loan, then sells the loan in the secondary market and credit line reverts down to fund more loans for that lender’s wholesale channel. A mortgage broker “shops” your loan with wholesale investors, this is the main advantage of working with a mortgage broker.
The wholesale mortgage market, is approximately a quarter of the market in today’s lending world, so it is quite small compared to its capitalized competitors.
How A Mortgage Lender Makes A Home Loan
A mortgage lender employs a retail loan officer to act as the sales person between the borrower and the end investor negotiating terms and conditions of the loan. A mortgage lender strictly deals with residential mortgage loans. The lender removes the mortgage broker from the equation, and uses its credit lines to originate loans by going directly to the consumer (removing the third party broker).
The mortgage lender like a broker, has the ability to shop your loan with its investors in the secondary market, thereby providing the shopping advantage as well as the advantage of closing the loan with the same company during the loan process.
How Mortgage Banks/Credit Unions Make Home Loans
Mortgage banks are depository institutions like Wells Fargo. These companies offer retail mortgage lending similar to the mortgage lender, but on much larger scale.
An advantage to using a bigger bank, brand-name recognition and once again, one party closing your loan. Some banks do offer wholesale mortgage loan financing where they act as a broker, this practice is more common with local financial institutions.
Credit unions and banks alike offer portfolio lending. Portfolio lending involves both the origination and servicing of that loan. You’ll find however, most credit unions to be more competitive, have to broker their loans.
What the mortgage company has the best rates
Traditionally, retail mortgage lenders or wholesale mortgage brokers offering Fannie Mae/Freddie Mac home loans provide the lowest interest rates on the open market. While these loans are typically tighter in terms of loan qualifying, compared to costlier portfolio loans, the interest rates and fees on the open market are the best of the best. Granted, if you see an interest rate that is too good to be true, i.e. significantly lower rate than other lenders, you’ll want to ask yourself :
1. Is the mortgage company a lender, broker, bank or credit union?
2. Which company is actually providing the funds?
3. Is the loan product or interest offered, a portfolio product?
4. Is the loan offering, a Fannie Mae or Freddie Mac delivered loan?
At the end of the day, most reputable mortgage companies might have some subtle differences between each other a few hundred dollars in costs and/or small interest rate variances such as a difference of .375% in rate.
*Mortgage Tip: the biggest separator between mortgage companies after considering rate, is service and responsiveness.
If you’re being quoted a rate that seems high, shop around and compare rates on your unique scenario from each type of mortgage company. Decide which mortgage company will best handle your home loan.