This ARTICLE On Choosing The Right Lender For You With No Mortgage Overlays Was PUBLISHED On August 13h, 2019
The mortgage industry went through major changes after the 2008 Real Estate and Mortgage Meltdown:
- The sub-prime mortgage lending sector of the mortgage industry went extinct
- New mortgage regulations went into effect
- Prior to these changes with new mortgage regulations, applying and getting approved for a home loan was very simple
- Most homebuyers can go to their local banks or any mortgage company and get an instant mortgage loan approval
- Non-QM Loans made a comeback
- Gustan Cho Associates introduced bank statement loans for self-employed borrowers
In this article, we will cover and discuss Choosing The Right Lender For You With No Mortgage Overlays.
Non-QM And Portfolio Mortgage Lenders
No income documentation/verification was extremely popular and almost all lenders had the same products where if you qualified with one lender, you can qualify with any bank or mortgage company.
- However, this is not the case now
- There are many mortgage lenders that offer mortgage loans but not all of them have the same lending requirements
- Choosing The Right Lender For You is one of the greatest challenges you as a borrower will face if you have less than perfect credit, lower credit scores, and higher debt to income issues
- The good news is that just because one lender may say no does not mean that you cannot qualify for another lender
- That is why choosing the right lender for you is extremely important
In this blog, we will be discussing the topic of choosing the right lender for you and we will start by explaining the types of mortgage lenders.
Lenders Who Are Direct Mortgage Lenders
Direct mortgage lenders are lenders who use their own funds to originate and fund the mortgage loan.
- Banks, credit unions, and mortgage bankers are all direct lenders
- Direct mortgage lenders may service your mortgage loan
- Or may decide to sell the servicing rights to a third party company
- Although direct mortgage lenders do use their own funds to fund the loan, most direct lenders will package up the loans they fund and sell them on the secondary market
- Not too many lenders will hold a 30 year fixed rate mortgage loan on their books
There are many advantages with working with a loan originator of a direct lender versus a mortgage broker.
Mortgage Brokers Versus Direct Lenders
The direct lender has control of their files where unlike a mortgage broker, who brokers loans out to wholesale mortgage lenders in lieu of a commission, control is limited:
- This is because mortgage brokers do not have control of the underwriting department of the actual direct lenders
- Loan Officers of direct lenders can have direct contact with the lender’s processing, underwriting, quality control, and closing department staff
- However, the disadvantages of choosing a direct lender versus a mortgage broker are that you will be limited on just the product that the direct lender has to offer
- Most direct lenders have mortgage lender overlays
- Lender overlays are mortgage guidelines that are on top of the minimum federal mortgage lending guidelines required by FHA, VA, USDA, FANNIE MAE, and FREDDIE MAC
This is when choosing the right lender for you becomes extremely important. We will cover overlays of direct lenders in a later paragraph.
Choosing Mortgage Brokers As Your Lender
Mortgage brokers are not direct lenders and do not lend with their own funds.
- Mortgage Brokers are third party salespeople who have a wholesale lending relationship with a direct lender
- The role of a mortgage broker is to get borrowers who are in needs of a mortgage loan and send the file to the direct lender
- The direct lender then pays the mortgage broker a commission, which is called a yield spread premium, for the referral of the borrower
Role Of Mortgage Brokers
A mortgage broker is a middleman who may represent the mortgage loan products of many lenders.
- The broker’s goal is to match you with the loan product that best meets your needs at the best price
- Once your loan is approved, you will usually deal directly with the loan originator or their mortgage service provider
Mortgage brokers need to be licensed just like direct mortgage bankers.
- One advantage mortgage brokers have over mortgage bankers is that they do not use their own funds to fund the mortgage loan of a borrower
- Mortgage brokers have broker relationships with direct wholesale mortgage lenders
- Brokers are not limited to one specific mortgage lender
- A typical mortgage broker company may have six or more wholesale relationships with direct mortgage lenders
- If a borrower does not fit a particular lender’s credit requirements to qualify for a mortgage loan, the mortgage broker can refer the borrower to a different direct lender that may be interested in approving the borrower’s loan application
Can A Borrower Go Directly To A Direct Lender That A Mortgage Broker Has A Relationship?
The answer to the above question is yes only if you were to go to them directly first.
- If you already are dealing with the mortgage broker and cancel the broker relationship and decide to go straight with the direct mortgage lender, it is up to the direct lender on how they will treat the situation
- Most mortgage brokers will not tell you the name of the direct lender initially
- But when you get the disclosures and docs, you will see the name of the direct lender that the mortgage broker has referred you too
- There are borrowers who feel that they will save a lot of money by by-passing the mortgage broker and going straight to the wholesale mortgage lender
- However, if you were to deal straight with the direct lender that the mortgage broker has a relationship with, the chances are that you will be dealing with the retail division of the direct lender
- The pricing may be similar as if you were dealing with the third party mortgage broker
Disadvantages of dealing with brokers may be that you may have higher fees and costs than dealing with a direct lender. However, brokers do offer invaluable services to borrowers who have challenged credit and higher debt to income ratios.
Preferred Lenders By Builders And Lenders Owned By Real Estate Companies
The mortgage business can be very profitable:
- Many national home builders are getting into the mortgage business either by opening their own mortgage companies
- Or by developing a relationship with mortgage companies and labeling them preferred lenders of home builders
- The same goes with real estate companies
- Larger real estate companies are starting their own mortgage business
- This holds true even though the mortgage industry is extremely regulated by the newly created Consumer Protection Financial Bureau, CFPB
- The CFPB does not mess around and is always on a watch out for violators of mortgage compliance and rules
- The way the CFPB works is that they will go after the larger nationwide mortgage companies
- Since the mortgage industry is full of thousands of mortgage regulations, the chances are that they will find something wrong with any mortgage companies’ operations
- A slap of the wrist is not ever heard of with the CFPB
Mortgage Compliance By Lenders
The CFPB is serious:
- The agency has no problem fining a mortgage company tens of thousands, hundreds of thousands, or even millions
- Most mortgage companies, whether mom and pop mortgage brokers or large national firms, will not appeal a ruling by the CFPB and just pay the fine
- There are issues when dealing with mortgage companies that are associated with home builders and/or real estate companies
- Most of the relationships between builders and realtors of preferred lenders referred by builders and realtors are illegal and blatant violations of RESPA but the practice still goes on
- Many home buyers have their own lenders and are already pre-approved with them, whether they are bankers, mortgage brokers or direct lenders before they visit a builder or real estate office to shop for a home
- Homebuyers who have pre-approval letters by their loan officers prefer to use the loan officer who already pre-approved them but more often than not is forced to change loan officers when they visit a home builder
- This is because the builder will only offer a builder’s incentive only if the home buyer will use the Home Builder’s Preferred Lender
RESPA Violations And Mortgage Rules And Laws
This practice is often illegal and violated the Anti-Steering rules of RESPA.
- You cannot steer a borrower to a preferred lender and offer the borrower an incentive only if the borrower goes to one particular lender
- The way builders do this and are often successful at it is by offering buyers a substantial incentive such as a $5,000 to $10,000 builder’s incentive towards options on the new construction home or closing costs credits
- This incentive by the home builder is only valid if the home buyer uses the preferred lender of the builder
There are builders that will offer the incentive to a home buyers lender of choice if the preferred lender of the builder cannot do the loan. But there are other builders that will not pass the builder’s incentive to another lender even if the builder’s preferred lender denies the buyer’s mortgage loan.
Advertising And Kick-Back Mortgage Guidelines
MSAs is short for Marketing Service Agreements.
- Marketing Service Agreements are a business agreement between a mortgage lender and a real estate company
- A lender will lease office space for a premium by the real estate company and the realtor will steer or recommend home buyers who are represented by real estate agents of their office
- The CFPB is cracking down on this practice and many larger mortgage lenders have terminated their Marketing Service Agreement programs due to the fear that they will get fined by the Consumer Protection Financial Bureau for RESPA Violations
Kickbacks are not allowed and are a violation of the Real Estate Settlement Act or RESPA.
Overlays Are Main Reason When Thinking Of Choosing The Right Lender For You
Any borrower with an 800 credit score, stable income, and 20% down payment will get approved for a mortgage loan with any lender.
- However, for those who have lower credit scores, gaps in employment, high debt to income ratios, outstanding collection accounts, judgments, tax liens, charge off accounts, bankruptcy, deed in lieu, foreclosure, short sale, or recent late payments, the choices will greatly narrow and choosing the right lender will be a very important decision
Lender Overlays Versus Agency Mortgage Guidelines
Most lenders have overlays which are additional lending requirements that they implement that is on top of the minimum lending guidelines impose by FHA, VA, USDA, and FANNIE/FREDDIE.
- For example, most lenders will not take on a borrower with a 580 credit score
- This holds true even though HUD minimum credit score requirements are 580 FICO to qualify for a 3.5% down payment FHA loan
- This higher standard on the minimum credit scores required by a lender is called a lender overlay which is perfectly legal
- Bottom line is just because you do not qualify by one lender does not mean that you do not qualify with a different lender
Choosing The Right Lender For You is important. Every borrower with credit issues should do their due diligence to make sure that they meet the minimum mortgage guidelines on the particular loan program they intend in applying for. Make sure that you ask about the lender overlays when choosing the right lender for you.