Are you shopping for a mortgage lender? Understanding what different types of mortgage lenders exist, and who to go for when you need help, can ensure that you find the right lender for your home loan.
What Is a Mortgage Lender?
A mortgage lender is defined as a financial institution or mortgage bank offering and underwriting home loans. Mortgage lenders evaluate your creditworthiness and your ability to make your mortgage payments, set terms, offer an interest rate, lay out your repayment schedule, and fund your loan. Then they service your loan by accepting, tracking and crediting your payments. There are several different types of mortgage lenders. Here are the advantages and disadvantages of each type.
Big banks have major brand name recognition, plenty of money to spend on advertising campaigns, and will be persistent about marketing their home loan products to you once they realize you are in the market for a home purchase. However, they may not be a good fit for several reasons.
- Big banks can have competitive rates for clients who
- Have great credit
- Have a high net worth
- Straight-forward and easily documented income
- Big banks often service the loans themselves instead of selling them to other loan servicers
- Big banks are highly regulated so there is a low probability you will run into deceptive advertising or bait and switch offers
- The approval process can be extremely slow
- Preapprovals can be unreliable, and completed by inexperienced employees
- Poor technology and strict lending requirements can shut many borrowers out
- There may be difficult communication during the loan process
- Big banks often rely on inexperienced Loan Officers (LOs) or call center staff who likely won’t be able to provide advice on how to structure the loan based on your specific situation
- Many real estate agents are wary of preapproval letters issued by big banks and may advise their sellers to choose another offer in a competitive listing situation
Smaller Regional Banks or Credit Unions
Local banks and credit unions have special appeal for some buyers who may feel a connection and have history with their banker. However, they often aren’t the most competitive choice.
- Niche portfolio programs not available through other lenders
- Sometimes competitive rates on standard loans
- Good home equity line of credit (HELOC) or 2nd lien mortgages
- Better communication and service compared to big banks
- “Service their own loans” (usually white labeling using a mega sub-servicer)
- LOs may be inexperienced and overworked, unable to give advice on loan structure based on your specific situation
- The loan process can be extremely slow
- If you have a question you’ll have to deal with a general call in number and slow call routing
- Rates and fees can be higher at some smaller banks and credit unions
Online lenders are on the rise, but many online “lending sites” aren’t created by actual mortgage lenders. Instead, they collect information about a consumer and sell the lead information to actual lenders. When inquiring about a loan online make sure you are requesting information from a specific lender and not a lead seller.
- Better technology
- No high-commissioned LO’s,
- Some of the most competitive rates available for qualified borrowers
- Transparent rates and fees provided using online rate quote tools
- A few have implemented automated processes to facilitate easier application processes
- Call centers staffed with inexperienced LO’s with little knowledge on advising clients based on their specific situation
- Rigid processes that can’t handle unique situations or unexpected issues arising
- Many real estate agents are wary of preapproval letters issued by online lenders and may advise their sellers to choose another offer in a competitive listing situation
- Unreliable preapprovals, lack of due diligence, and poor communication that can lead to unpleasant surprises and delays late in the loan process
- Not built for the complexities and moving parts of a purchase transaction – Online lending has always focused on refinance transactions. Many online lenders do very little purchase financing.
Retail Mortgage Banks
A retail mortgage bank is dedicated to mortgage lending and does not offer other banking products such as checking and savings accounts. They typically are staffed with independent LOs, and independently run Net Branches which can cause rates and fees to vary depending on the Loan Officer you are working with.
- Often have more experienced LOs compared to other lenders on this list
- Higher levels of service, geared for building repeat and referral business
- Faster processing of financing for new home purchases
- A wide variety of options when it comes to home loans
- More solid and reliable preapprovals, looked on with confidence by real estate agents, who may also have a referral relationship with one or more LOs
- May have newer technology, facilitating faster home loan preapprovals and approvals
- LOs may be qualified to offer information on loan structuring
- Typically have high rates and fees due to high LOs’ commissions
- Experiences may vary since each LO has their own process, experience and methods
- LOs move between companies a lot which can be a problem if you LO moves companies while your loan is in process
- Given the higher rates and fees of this channel LO’s are often well trained to avoid the rate and cost conversation and focus more on other value adds such as speed or advice. By the time you get an actual solid quote it may be too late in the process to compare and switch lenders.
A mortgage broker isn’t a lender, but more of a middleman. They can be useful if you want to spread a wide net and see what’s out there, but lack control over many parts of the process.
- Brokers have access to the wholesale market with a variety of lenders to choose from
- Brokerages are often locally owned with a footprint in the community
- Good brokers can offer solid advice on how to structure your loan
- Easier to verify reputation and reviews of the company online than for larger lenders with many LOs
- Relying on wholesale lenders to handle a lot of the loan process can cause issues with an inconsistent experience
- Lack of control of the underwriting process and timelines can slow approval during high volume purchase seasons (spring) and times of market volatility (low rates)
- Inability to provide credits for things like lock extensions or higher than expected costs (due to government restrictions on LO comps and how they impact brokers)
- Lack of control on appraisal orders, as waiting on a wholesale lender to send official loan disclosure can waste days
- Potential issues at the last minute prior to the final closing week if the wholesale lender delays underwriting and funding
- Lack of compliance oversight and quality control compared to lenders means some brokers may choose to operate in “gray areas” putting your loan at risk
Call Center/Direct Mail Lenders
Generally any lender cold calling you or sending direct mailers to you without a previous lending relationship with you is best to avoid.
- None that I’ve ever seen
- Typically, these offers are related to data the lenders has purchased from credit bureaus, the county records or other data sellers and geared towards getting you to respond
- Given the high cost of market and client acquisition these lenders often have much higher rates and fees compared to other lending sources on this list
- Many of these lenders don’t care about reputation and service and only care about closing the sale for the commission
- Hard sales tactics with little or misleading information
- Lack of transparency about who they actually are making it hard to research their legitimacy
- Low rate offers are generally bait and switch or come with extremely high fees
What Type of Lender Is Sammamish Mortgage?
Sammamish Mortgage is a full service mortgage bank with the best aspects of a streamlined online lender. We have a stellar reputation, an online presence that combines technology and service for a streamlined loan experience, full control of the loan process with in-house underwriting, and access to a wide range of wholesale and correspondent lenders.
Our non-commissioned Loan Officers have multiple years of experience and have each successfully closed anywhere from several hundred to several thousand loans. They inform and educate our home buyers without hard sales tactics. We are committed to being transparent with our rates and fees, which are posted and updated on our website 24/7.
Frequently Asked Questions:
Still have questions? Here are some answers to basics you should know about before searching for a lender. You should also keep these questions in mind when you talk to your LO.
How do I get the best rate?
Getting a favorable interest rate on your mortgage can make a difference of tens of thousands of dollars or even more over the life of your loan. Your credit score can be one of the biggest factors in the interest rate you are offered.
The higher your interest rate, the more the lender makes back over the first half of your loan term. This protects them to a degree if you default, as your early loan payments will consist of the highest interest payments.If your score is below 700, you might want to delay buying a home until you raise your score.
However, balance this decision with the knowledge of how much you are paying in rent, and how much you might be able to save by making mortgage payments instead. Even with a credit score under 600, you may still have a path to home ownership with the right lender.
What Is APR and Why Does It Matter?
When you are lender shopping, you may see an Annual Percentage Rate (APR) heavily advertised for home mortgage loans. You should talk to your Loan Officer to get a clearer idea of your interest rate, as an APR can be misleading and confusing. However, when it comes to mortgages, the APR can be a way to clarify your interest rate. Here’s how it works:
Your mortgage may include costs and financing fees outside of your interest rate. These depend in a large part on the lender you choose, and can include but aren’t limited to:
- Loan origination fees
- Loan processing fees
- Document preparation fees
- Underwriting fees
- Private mortgage insurance (PMI)
- Escrow fees
- Wire transfer fees
- Discount points
These can greatly increase the amount that you are paying overall for your home loan. If they total thousands of dollars, then your APR on the loan will be much more than the basic interest rate charged. The Truth In Lending Act (TILA) mandates that lenders give you an APR calculated as a real interest rate, meaning the amount in interest you’ll pay over the life of the loan including these extra financing fees.
Before the TILA, a mortgage lender could advertise a very low rate, but at closing you might discover that you were expected to buy discount points to qualify, meaning thousands of dollars due at closing. Now you can easily see at a glance if there is a wide disparity between your “interest rate” and the APR.
Am I Required to Use the Lender Who Preapproved Me?
The short answer is no, of course you don’t. No-one can force you to use a lender you don’t want to do business with. If you lose faith in your lender and want to switch, you can. As long as you’re a reasonable length of time from closing and you can get through the loan application, underwriting, and approval process quickly with your new lender, your options remain open.
Suppose you have a lender lined up, but have realized that you would rather work with a mortgage bank like Sammamish mortgage to take advantage of a better interest rate. Assuming your credit can withstand a new pull, your documents are all in order, and your offer on your dream home is still far from closing, switching to a new lender shouldn’t be an issue.
The one complication could be if you are switching loan types. If you’ve already gone through the appraisal process, but switch to a FHA loan with a more stringent appraisal process, then you might miss your closing date. If you’ve already locked a rate, you’ll also have to find out what your new lender’s rate will be and relock.
If you’re less than two weeks from closing, are switching loan types, or end up failing to meet conditions on an already-in-the-works home buy, a few things could happen. You could lose your escrow if you’re not able to meet the conditions. You could have the sale fall through if you have to reappraise and the numbers are too far off.
Your Sammamish Mortgage Loan Officer Can Help You Start the Preapproval Process Today!
We’ve fine-tuned the preapproval process to make it one of the easiest experiences you’ll have in the whole home buying process. Buying a home should be fun and exciting, not stressful. Get preapproved today!
Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.
Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.