Credit.org is approved by the U.S. Department of Housing and Urban Development (HUD) as a comprehensive housing counseling agency. We help home buyers prepare to become better educated and informed homeowners. For most people, understanding the process and requirements of obtaining a mortgage loan as well as which type of lender to use and what loan to apply for is one of the most challenging aspects of the home-buying process. So, let us help by breaking down the definitions of the various types of mortgage lenders and their terminology: First, who’s who:
A “loan officer or mortgage originator” is a broad title that describes the role of an entity or a person who is licensed by the State to offer and provide mortgage loans. A mortgage originator may work within a bank, a direct mortgage lender or be an independent mortgage broker. Any person, regardless of their job title, who, in conjunction with a completed mortgage application and quotes an applicable loan interest rate and term must hold an active and in good standing license under the SAFE (Secure and Fair Enforcement for Mortgage Licensing) Act. Licensing and registration for mortgage originators vary by state, but the SAFE Act establishes the national minimum standards.
A mortgage broker, who is generally an independent company or person, works on behalf of a borrower to obtain the best available mortgage loan for their individual circumstances. Similar to an Insurance Broker, they usually work or source loans with multiple lenders, who have a variety of loan products. A broker will take your loan application and assess your overall credit and financial situation. On your behalf, a Broker ‘shop’s for the best mortgage product to fit your individual circumstances and once a mortgage lender is found, they help facilitate the entire process.
Similar to any other transactions where you might engage the services of a broker (insurance, jewelry, car) to work on your behalf, it is not not mandatory. There is a charge for using a broker, but again like other services, this fee can be paid directly by you, the lender and can be included in the final loan transaction. You may get a loan from a lender without going through a broker at all. It’s even possible to compare multiple loans directly with lenders rather than going through a broker.
This is the title typically held by a person who works for the actual lender, whether as part of bank’s lending division or an independent mortgage company. This position is also required to hold a license. Similar to a loan originator, they handle all of the initial review of your loan including taking your application, offering loan terms and interest rates and collecting the documentation that will be required for loan approval. Lender’s do require a great deal of documentation and verification of your finances, so be aware and prepared.
Processor and Underwriter
These are people that work on behalf of the lender to facilitate all aspects of the loan approval processor. The processor is responsible for collecting and reviewing all of the required documentation and clearing any exceptions or conditions that must be met, such as receipt of a property appraisal or income verification. The underwriter is responsible the reviewing the entire file of information, including your specific financial ability to pay on the loan as well that the property itself is sufficient collateral to support the loan amount.
There are also several types of lenders who provide various types of mortgage loan products. Think of it this way, there are stores that specialize in a specific product, like a fitness shoe store and other that offer every type of shoe. Similar, there are lenders that specialize in niche products or clients, such as government programs for first time homebuyers or only offer second or home equity type of loans. Others may offer a full range of mortgage products to serve a wide range of needs. Selecting the type of mortgage lender will heavily depend on your specific needs.
These are the traditional banks, local, nationwide or credit unions that also offer mortgage loan products. Typically a retail bank is one that serve clients directly within your community, either through a walk in location, phone or Internet services. Generally, you will work with a loan officer who works for the bank. This is often also referred to as a “Direct Mortgage Lender”.
This is a kind of bank that just offers mortgages and they offer and sell their loan products through an independent brokers or loan originators. Both brokers and loan originators specialize in communities and are also available via local offices, phone or Internet.
Secondary Market Lenders
These are the companies, mostly banks or large lending corporations that actually provide the money for your final loan. Fannie Mae and Freddie Mac are the two most well-known providers of money to banks and mortgage lenders. They are the final buyer of the the loans after they have been underwritten first by local mortgage brokers or banking financial institutions.
Now it’s important to understand that most lenders do not intend to retain your loan after it’s been funded. If your loan is sold or transferred to another entity shortly after it has been closed, rest assured this is very common as it’s part of how the mortgage finance industry works behind the scene.
When your loan is sold, it does not change any of the terms or conditions. Generally, the only thing that will be different for you is who you will make the payments to. There are federal laws that protect you when your loan is sold or transferred. So if you get a notice that your loan has been sold or transferred, review the documentation provided to ensure there have been no adverse changes to the terms. If there is, contact your lender immediately.
Which kind of lender to choose?
If you’re in the market for a home loan, you might wonder if you should seek a particular kind of lender over another. The answer will depend a great deal on your unique circumstances. A community lending institution or mortgage broker with access to multiple kinds of lenders will be able to help you get access to the particular kind of loan that works best for your situation.
Generally speaking, there are pros and cons to different kinds of lending strategies:
- Pro: The broker is working on your behalf and understands your circumstances when shopping for the best mortgage product to suit your needs, making sure that your application is complete and acceptable to the lender.
- Con: A Broker charges a fee above any of the lender fee’s to perform their work. In some instances, the fee’s are paid by the lender however if they are not, your total loan costs are generally higher when you use a broker.
- Pro: If you already have a bank account or relationship with a lender, getting the loan could be easier as they already have history with you as a client. You may also be offered discounts for having multiple services.
- Con: You may not be getting the best deal in the market as they may have limited products or have tighter loan standards with more requirements to fulfil.
- Pro: Mortgages are their only product. They are focused on home loans, and can design their operations around this single objective, making it quicker and potentially less expensive for you to get the loan.
- Con: They may not offer the full range of mortgages, including both conventional and FHA loans.
Ultimately, making the best choice about which kind of lender to use depends on your unique situation. Pre-purchase homebuyer education will help you know your options and grant access to more kinds of loans tailored for first-time buyers. The earlier you seek out homebuyer education, the more it will benefit you.