There are three main sources of mortgage financing to choose from – mortgage brokers, direct lenders and correspondent lenders. There is a common misconception that all banks and brokers offer the same product offerings, but that is far from the truth. Each bank is good at something different and offers different loan options and underwriting guidelines. Depending on your loan scenario, you might not fit the parameters of what one lender allows, but you might fit within another lender’s program without any trouble at all. That’s why it’s important to understand the differences between the various sources of lending before you decide to apply for your mortgage. Here is a brief description of each of the three most common sources of financing and what the benefits and drawbacks are for each:
Mortgage Brokers work with several different lenders in order to help you arrange financing. They do not close the loans in their own name (or with their own funds), but act as an intermediary between you and the bank to help you find the best loan for your loan scenario and help process the loan through closing.
Benefits: Because mortgage brokers work with various lenders, they can select from various lending options to help you find a loan that best fits your transaction. This ensures that the loan options you are presented with will encompass a larger segment of the marketplace than if you were to apply for your mortgage with a direct lender.
Drawbacks: Because mortgage brokers rely on the banks to underwrite their loans, they generally have much less control over the timing of the transaction and how the process is handled by the lender. Additionally, a number of the larger financial institutions do not offer mortgages through mortgage brokerages (many have stopped just recently) and an applicant who goes through a mortgage broker for their financing may not have a full view of all available options in the marketplace.
The most common direct lenders are the big national and international banks that offer a full set of financial products (mortgages, personal investments, consumer banking, etc.). These banks lend their own funds, but sometimes package their loans and re-sell them to other financial institutions (i.e. Fannie Mae, Freddie Mac, among others). When the loan is re-sold on the secondary mortgage market, the originating lender oftentimes continues to “service” the loans, which means that they handle all of the customer service, billing and logistical details directly with the consumer on behalf of the other institution that purchased the underlying debt from them. Some lenders also “portfolio” their loans (they keep them on their own books rather than re-selling them) and continue to operate as the debt holder and servicer on the loan. These portfolio lenders tend to be smaller or medium sized local banks and credit unions.
Benefits: Because of the sheer volume of loans that some of the largest lenders do, they have economies of scale that can result in slightly more aggressive terms in some circumstances. They also have their own underwriters, which gives their team more control over the approval process compared to a mortgage broker. Portfolio lenders sometimes have niches that aren’t available through other lenders because they can create their own underwriting guidelines (since they don’t re-sell their loans to other entities) and may be willing to take on a loan that doesn’t fit into a perfect “box”.
Drawbacks: The process can be less efficient because many of the larger banks have more loan volume than they can handle effectively and that can cause significant delays and frustrations during the approval process. Banks that re-sell their loans can also be very rigid with their policies since they may have to strictly adhere to the guidelines of the larger institution that purchases the loan from them on the secondary market. The secondary market requirements typically drive all underwriting decisions, so there is very little (if any) common sense that goes into underwriting a loan with these types of lenders. Some portfolio lenders are more lenient with certain underwriting guidelines, but they typically offer higher rates on most loan programs since they don’t do a significant enough volume of business to keep their profit margins as low as the larger banking institutions. And unless you were referred to a specific mortgage rep at a direct lender, chances are that the bank will pair you up with whomever happens to be next in line to take an inbound call or online inquiry – not necessarily the person who understands lending in your area or who is most qualified to handle your transaction.
Correspondent lenders are a sort of hybrid between a mortgage broker and a direct lender. While correspondent lenders close loans in their own name like a direct lender does, they re-sell their loans to many of the larger direct lenders on the secondary market. They therefore have several lenders’ loan products and interest rates to choose from on behalf of their clients just like a mortgage broker would. While correspondent lenders underwrite and close most of their loans in-house, they also have the ability to broker out transactions with lenders and investors that do not have a correspondent option.
Benefits: Correspondent lenders have access to a much wider product offering than other sources of financing because they have both correspondent and broker options at their fingertips – and those include most of the direct lenders who have stopped doing business with mortgage brokerages. This oftentimes results in finding the loan that truly fits your needs the best while also taking advantage of aggressive pricing available in the market. On average, correspondent lenders close faster and more efficiently than other financing sources because there is less red tape and less rigid underwriting protocols that have to be followed by the larger direct lenders (and mortgage brokers who place their loans with these direct lenders). Correspondent lenders’ employees are typically more knowledgeable about lending in your area since most of them have offices in the areas that they provide loans in.
Drawbacks: Since correspondent lenders don’t produce the same volume of business as the larger direct lenders, in some instances the direct lenders have a slight advantage in pricing their loans a little lower on certain transactions.
A thank you to Mark Maimon for the thorough explanation!
VP - Residential Mortgage Group
Sterling National Bank
212-401-0843 - Manhattan
718-210-1143 - Brooklyn