Mortgage Borrowers: Choosing The Right Lender For You

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 and 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 where most home buyers can go to their local banks or any mortgage company and get an instant mortgage loan approval. 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 mortgage lender may say no does not mean that you cannot qualify for another mortgage lender so that is why choosing the right lender for you is extremely important.

On this blog, we will be discussing the topic of choosing the right lender for you and we will start with 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 mortgage lenders will hold a 30 year fixed rate mortgage loan on their books. There are many advantages with working with a mortgage loan originator of a direct mortgage lender versus a mortgage broker. 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 because mortgage brokers does 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 is that you  will be limited on just the product that the direct lender has to offer. Most direct mortgage lenders have mortgage lender overlays which 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 lender 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 sales people who have a wholesale lending relationship with a direct lender and their role 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.

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 needs 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 and 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 mortgage 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 mortgage lender initially but when you get the disclosures and docs, you will see the name of the direct mortgage lender that the mortgage broker has referred you too. There are borrowers who feel that they will 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 and the pricing may be similar as if you were dealing with the third party mortgage broker.

Disadvantages of dealing with mortgage brokers may be that you may have higher fees and costs than dealing with a direct lender. However, mortgage 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 and 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 even though the mortgage industry is extremely regulated by the newly created Consumer Protection Financial Bureau, CFPB. The CFPB does not mess around and are always on a witch out for violators of mortgage compliance and rules. The way the CFPB works is that they will go after the larger national mortgage companies and 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. The CFPB is serious and 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 is associated with home builders and/or real estate companies and most of 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. Home buyers 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 are forced to change loan officers when they visit a home builder because the builder will only offer a builder’s incentive only if the home buyer will use the Home Builder’s Preferred Lender . This practice is often illegal and violated the Anti-Steering rules of RESPA. You cannot steer a borrower to a preferred mortgage 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.

MSAs is short for Marketing Service Agreements. Marketing Service Agreements are a business agreement between a mortgage lender and real estate company where a lender will lease an 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 is 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 a 800 FICO 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. Most lenders have lender 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 mortgage lenders will not take on a borrower with a 580 FICO credit score even though FHA minimum credit score requirements is 580 FICO to qualify for a 3.5% down payment FHA home purchase 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 mortgage lender. Choosing The Right Lender For You is important and every borrower with credit issues should do their due diligence to make sure that they meet the minimum mortgage lending guidelines on the particular mortgage loan program they intend in applying for and make sure that you ask about the lender overlays when choosing the right lender for you.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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