Home Buyer & Home Seller Guide

When it comes down to getting a mortgage for your home there are several ways to do it. However, what is important is to understand which type of lender or avenue of finance is best suited to your needs. Some of the options when you talk about home finance range from the traditional banks and large financial institutions to your credit unions and building societies. More non-traditional channels include non-conforming lenders and private channels. Listed below are the various forms of financing and their descriptions.

Portfolio Lending Home Mortgage Lenders

This is you more traditional form of mortgage lending. Banks and large financial institutions are considered portfolio mortgage  lenders owing to the fact that they are lending you their own money without having to worry about the fact that these new loans have now got to be sold as soon as possible on the secondary market. As a result of this, these large financial institutions are not at the mercy of FannieMae or FredieMac. However, if these institutions do offer government backed lending products they too are involving themselves in mortgage banking. As a side note, if your loan has been with a financial institution for over a year and you have been making your repayments on time and have no late charges, then in that case your loan is what is known as a “seasoned” loan and the institution can sell it on the secondary market to raise further funds to increase it’s own portfolio. In this even the financial institution goes from being you lender to your servicer.

Direct Mortgages Lenders

Direct lenders are the lenders who fund their own originated loans. It might be fair to say that this is similar to a portfolio lender. However, this is not always the case. Unlike portfolio lenders, who fund their own loans through their own funds and have to be very large banks or financial institutions, direct lenders can be either large or very small. Unlike portfolio lenders who use their own money, direct lenders use their reserve lines of credit to fund the same. One way to be able to tell the difference between the two used to be the fact in whose name the loan papers were drawn. However, nowadays even the smallest lender can have the loan done in their name.

Home Mortgage Lenders: Correspondents

This type of lending usually has 2 parties to it. The originator is the person who generates the loan, much like a mortgage broker, and a sponsor, is the party to whom the originator bundles up the loans and sells to. The sponsor in turn sells the loans to a mortage banker like FannieMae or Freddie Mac. Correspondents as a rule work with institutions which have a very strong wholesale mortgage department.

Banks & Credit Unions As Mortgage Lenders

Banks usually fall under the category of a portfolio lender owing to their size and scale of operations and in addition they use their own funds for the funding of loans. However in certain cases banks which use warehouse lines of credit could be more direct lenders in their way of operation. Credit unions on the other hand usually operate as correspondents owing to the fact that they on sell their loan bundle to sponsor institutes. In some cases very large credit unions could assume the position of a portfolio lender.

It is essential that consumers understand they type of lender they are dealing with to understand the inner workings of their mortgages.

References:

1. Types of Mortgage Lenders – Mortgage X
2. Types of mortgage lenders – Real Estate ABC