As you hunt for a new home, you will come across a number of options – including different possibilities for financing your mortgage loan. There are many different types of lenders and institutions that offer home loan programs. One of the most important distinctions to make is the difference between a mortgage lender and a mortgage broker.
Mortgage Lenders
Those who actually originate home loans are called lenders. Direct mortgage lenders (that you are likely to work with) typically fall into one of two categories:
- Mortgage Bankers
- Portfolio Mortgage Lenders
In both of these cases, the mortgage lender originates the loan and may even service it for some time. You work directly with the mortgage lender who makes the deal, gets the underwriting done, and provides you with the funds to buy a house. Then, you make payments to the lender.
In the case of mortgage bankers, the financing often comes from a warehouse line of credit. The mortgage banker is actually taking out a line of credit in order to give you a home loan. The mortgage banker then sells your home loan on the secondary market to investors or servicers (like Freddie Mac and Fannie Mae).
Portfolio mortgage lenders have their own cash reserves, due to the fact that many of them offer retail banking services (e.g., deposit accounts). As a result, these mortgage lenders finance your loan and you make payments to the lender for a good portion of the term of the loan. Note that some portfolio lenders do sell loans on the secondary market.
Mortgage Brokers
With a mortgage lender, your choices are limited to the programs offered by that particular lending institution. Mortgage brokers, however, offer you the ability to access a variety of lending programs. Independent mortgage brokers may be able to help you choose from a variety of mortgage lender programs.
Keep in mind that brokers do not actually finance loans, nor do they originate them. Brokers process loans and they can help homebuyers apply for mortgage loans, but they are not actually lenders.
A mortgage brokers uses his/her knowledge of the market to construct a deal, which is then sent to a mortgage lender. This lender is not restricted by an institution, usually, as long as you are working with an independent broker. The mortgage lender then approves the loan and underwrites it, and provides the financing. The broker acts as a go-between or middle man, and receives a commission or rebate from the mortgage lender when the loan is completed.
One of the main advantages of working with an independent mortgage broker is that you have access to loans and products from a variety of institutions, increasing the chances that you find a mortgage product that fits your situation. It’s important to make sure that your broker is properly licensed and to check his/her credentials before proceeding.