Types Of Lenders And How Mortgage Process Works
Types Of Lenders And How Mortgage Process Works
This BLOG On Types Of Lenders And How Mortgage Process Works Was PUBLISHED On May 11th, 2019
There are various types of lenders. Borrowers may benefit from one type of mortgage lender versus a different type.
- Mortgage Borrowers should do extensive research on the type of lenders they may benefit from
- Not all lenders are the same
- There are mortgage brokers who are middlemen between borrowers and the lender
- There are full eagle mortgage bankers who are the actual lender with no middlemen
- Correspondent lenders are lenders who use their money from their warehouse lines of credit and fund loans with their own money with a partnership of a full eagle lender
- Mini-correspondent lending is smaller types of lenders that originate and fund the loans under their own company name
We will discuss the types of lenders and how the mortgage process works in this blog.
What Types Of Lenders Are Mortgage Brokers
Mortgage Brokers are not lenders. Brokers are licensed professionals who act as a go-between between the actual lender and a borrower.
- They have no control over the actual lender’s processing and underwriting team
- Brokers do have their own mortgage processors who are trained to be familiar with the actual lenders’ mortgage guidelines and requirements
- Mortgage Brokers get paid a commission after the loan closes
- Broker’s commissions are disclosed on the Closing Disclosure as a Yield Spread Premium
- One disadvantage of mortgage brokers is they do not have full control like mortgage bankers do
- They do not have operations staff. They are reliant on the actual lender
Mortgage Brokers may have over a dozen or more lenders they do business with.
Banks And Credit Unions
Many banks offer mortgage loans. Banks are FDIC regulated. Credit Unions are exempt from licensing as well.
Here is what Investopedia defines what a federal credit union is:
What is a Federal Credit Union (FCU)
A federal credit union (FCU) is a credit union regulated and supervised by the National Credit Union Association (NCUA). The NCUA is a federal government agency with authority designated by the Federal Credit Union Act of 1934 to oversee the national credit union system in the United States. The NCUA provides chartering for U.S. credit unions similar to the chartering process by the Office of the Comptroller of the Currency for national banks.
Licensed Loan Officers Versus Non-Licensed:
- Loan Officers at banks do not have to be licensed. Bank Loan Officers are exempt from NMLS Licensing
- They just need to be registered with the NMLS
- Most loan officers who work at banks can do business in all 50 states without being licensed
- One disadvantage with working with a loan officer employed by a bank is banks have many overlays
- For example, to qualify for an FHA Loan with 3.5% down payment, the minimum credit score required is 580 FICO
- However, most banks require 640 FICO even though FHA only requires 580
- The higher credit score required by banks is called lender overlays
- FHA does not require outstanding collections and charged off accounts to be paid to qualify for FHA Loans
- However, most banks require all collection and charged off accounts to be paid in order to qualify for FHA Loans
- This is called a lender overlays on collection and charged off account
Borrowers with bad credit and/or lower credit scores will need other lenders with no overlays besides banks to qualify for home loans.
Mortgage Bankers are companies who use their own money to fund home loans.
- Mortgage Bankers have warehouse lines of credit they use to originate and fund government and conventional loans
- They tap into their warehouse lines of credit to fund the loan
- After the loan funds, the mortgage banker then sells the loan they funded on the secondary market and/or to a larger mortgage banker that pools loans together and sells it to the secondary market
- Once the loans are sold on the secondary market, the proceeds are used to pay down the warehouse lines of credit
- Mortgage Bankers make money from the spread they make between the loans they fund and the sale on the secondary market
- The yield spread premium (YSP) is not disclosed on the Closing Disclosure
- Due to being able to fund with their own money, mortgage bankers have full control versus mortgage brokers
- Mortgage Brokers are not lenders and do not have full control
- Brokers are dependent on lenders for underwriting and funding decisions
- Some mortgage bankers have the ability to broker loans out
For example, Gustan Cho Associates at Loan Cabin Inc. are mortgage bankers/direct lenders. We use our own money to originate and fund government and conventional loans. However, we can also broker loans that we cannot bank.
Other types of lenders are correspondent lenders.
- Correspondent Lenders use their own money to originate and fund government and conventional loans. However, they partner up with a full eagle mortgage banker
- The mortgage banker will underwrite the file
- The correspondent lender will then close the loan under their name
- The correspondent lender will prepare closing docs and fund the loan
- The correspondent lender will use their own warehouse line of credit to fund the loan
- After the loan funds, the correspondent lender will sell the loan to the mortgage banker who has underwritten the loan
- The mortgage banker will pay the correspondent lender
- The correspondent lender will then pay down their warehouse lines of credit so they can originate and fund more mortgage loans
What Are Mini-Correspondent Lenders
There are certain lenders who are classified as mini-correspondent lenders.
As the name implies, “mini” refers to a smaller version of a correspondent lender, which is a special type of mortgage lender that originates and funds loans in its own name. Correspondent lenders can then sell their closed loans on the “mortgage secondary market,” where mortgage originators and mortgage investors get together to do business. Correspondent lenders have their own mortgage underwriting staff and fund the loans with their own money. (This is in contrast to a mortgage broker, which doesn’t do any underwriting, loan approval or funding in-house.) The biggest difference between a mini-correspondent and a correspondent lender is that the “mini” version has a smaller net worth. Mini-correspondents increase the amount of funds they have available to lend by establishing relationships with one or more investor relationships. Mini-correspondents access these investor funds by drawing from warehouse (credit) lines. As these loans are sold in the secondary mortgage market, the warehouse line is replenished and those funds are available to assist the next homebuyers. In this way, mini-correspondents can continue to supply a steady stream of mortgage financing. Like correspondent lenders, mini-correspondents originate and close loans in their own names and are responsible for such mortgage processing activities as issuing disclosures, quality control policies, regulatory compliance at both federal and state levels, funding review and appraisal ordering. In mid-2014, the Consumer Financial Protection Bureau (CFPB) issued guidelines for the operation of mini-correspondents covering these very topics
NON-QM And Portfolio Lenders
NON-QM Loans are alternative types of lenders that cater to borrowers who cannot qualify for government and/or conventional loans.
- There are no waiting period requirements after bankruptcy and/or a housing event such as foreclosure, deed in lieu, short sale with non-qm loans
- NON-QM Lenders partner with mortgage bankers and brokers to get business
- Self-employed borrowers can benefit from non-qm bank statement loans where no income tax returns are required
A large percentage of our business at Gustan Cho Associates at Loan Cabin Inc. are non-qm mortgages.
Which Types Of Lenders Is Best For Me?
A borrower with 800 FICO, low debt to income ratio, no credit blemishes, large down payment can choose any types of lenders and will get approved. However, borrowers with past credit/income issues may need to choose a lender that can cater to their individual needs. Gustan Cho Associates at Loan Cabin Inc. is a national five-star direct lender with no overlays on government and conventional loans. We also have the ability to broker non-qm loans as well as specialty loan programs. Please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org. We are available 7 days a week, evenings, weekends, and holidays.