Mortgage Brokers [such as – Aiello & Associates]

The major strength of mortgage brokers is that they can shop the wholesale lenders for the best rate much easier than a borrower can. They also learn the “hot points” of certain wholesale lenders and can handpick the lender for a borrower that may be unique in some way. Mortgage brokers will be able to advise you whether your loan should be submitted to a portfolio lender or a mortgage banker. Another advantage is that, if a loan gets declined for some reason, they can simply repackage the loan and submit it to another wholesale lender.

One additional advantage is that mortgage brokers tend to attract a high number of the most qualified loan officers. 

Mortgage Lenders vs. Mortgage Brokers

A good place to start is with the difference between mortgage lenders and mortgage brokers.

Mortgage lenders are exactly that, the lenders that actually make the loan and provide the money used to purchase a home or refinance an existing mortgage. They have certain criteria you must meet in terms of creditworthiness and financial resources in order to qualify for a loan and set their mortgage interest rates and other loan terms accordingly.

Mortgage brokers, on the other hand, don't actually make loans. They work with multiple lenders to find the one that will offer you the best rate and terms. When you take out the loan, you're borrowing from the lender, not the broker, who simply acts as an agent.

Often, these are wholesale lenders who discount the rates they offer through brokers compared to what you'd get if you approached them directly as a retail customer. 

Banks and Savings & Loans

Their major strength is that you will recognize their name. In addition, they will usually be operating as a mortgage banker, a portfolio lender, or both, and have the same weaknesses and strengths.

Wholesale and Retail Lenders

Wholesale lenders are banks or other institutions that do not deal directly with consumers, but offer their loans through third parties such as mortgage brokers, credit unions, other banks, etc. Often, these are large banks that also have retail operations that collaborate with consumers directly. Many large banks, such as Bank of America and Wells Fargo, have both wholesale and retail operations.

In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party – bank, credit union, or mortgage broker – in most cases is simply acting as an agent in return for a fee.

Retail lenders are exactly what they sound like – lenders who issue mortgages directly to individual consumers. They may either lend their own money or may function as an agent. Retail lending may simply be one function offered by a larger financial institution, which may also offer commercial, institutional, and wholesale lending, as well as a range of other financial services.

Warehouse Lenders

Somewhat similar to wholesale lenders are warehouse lenders. The key difference here is that, instead of providing loans through intermediaries, they lend money to banks or other mortgage lenders with which to issue their own loans, on their own terms. The warehouse lender is repaid when the mortgage lender sells the loan to investors.

Mortgage Bankers

Another distinction is between portfolio lenders and mortgage bankers. The vast majority of U.S. mortgage lenders are mortgage bankers, who do not lend their own funds, but borrow funds at short-term rates from warehouse lenders to cover the mortgages they issue. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most mortgages issued in the United States.

If we are talking about the larger mortgage bankers, you can count on them having several strengths. For the biggest ones, you will recognize the brand name.

Usually, they are much better at promoting special first-time buyer programs offered by states and local governments, which have lower interest rates and costs than the current market rate. These programs are often available to buyers who have not owned a home in the last three years and fall within certain income guidelines.

Mortgage bankers may incur problems because they are just too big to manage, or they may operate like well-oiled machines.

If you are buying a home and you need a VA or FHA loan and the development you are buying in has not yet been approved, they will be better at getting it approved than other lenders.

If your home loan is declined for some reason, many mortgage bankers allow their loan officers to broker the loan to another institution.  However, because your loan officer is so used to promoting the company’s product, he may not be familiar with which institution may be the best one to submit your loan to.  Another reason is because wholesale lenders do not expect to get many loans from direct mortgage bankers, so they do not expend much marketing effort on them.

Portfolio Lenders

Portfolio lenders, on the other hand, use their own funds when making home loans, which they typically maintain on their own books, or "portfolio".  Because they do not have to satisfy the demands of outside investors, they can set their own terms for the loans they issue.

This makes portfolio lenders a desirable choice for "niche" borrowers who don't fit the typical lender profile – perhaps because they're seeking a jumbo loan, are considering a unique property, have flawed credit but strong finances, or may be looking at investment property. You may pay higher rates for this service, but not always – because portfolio lenders tend to be incredibly careful who they lend to, their rates are sometimes quite low.

Savings & Loans are quite often portfolio lenders, as are some banks. Portfolio lenders generally promote their own portfolio loans, which are usually adjustable-rate loans. They will often pay more compensation to their loan officers for originating a portfolio product than for originating a fixed rate loan. You may also find that they are not as competitive as mortgage bankers and brokers in the fixed rate loan market.

However, it is often easier to qualify for a portfolio loan, so borrowers who may not qualify for a fixed rate loan may be able to obtain a loan from a portfolio lender.  A borrower may be able to qualify for a larger loan from a portfolio lender than he could obtain from a fixed rate lender.

Portfolio lenders also can serve as niche lenders because certain things are more important to them than meeting the more standardized underwriting guidelines of a mortgage banker.  An example would be a savings & loan, which is more concerned with an individual’s savings history than being able to fully document income and other things.

If you apply for a loan with a portfolio lender and you are declined, you usually must start the process over with a new company.

Hard Money Lenders

If you can't qualify through a portfolio lender, a hard money lender may be your option of last resort.  Hard money lenders tend to be private individuals with money to lend, though they may be set up as business operations.  Interest rates tend to be quite high – (as high as 12 percent in some cases) – and down payments may be 30 percent and above.  Hard money lenders are typically used for short-term loans that are expected to be repaid quickly, such as for investment property, rather than long-term amortizing loans for a home purchase.

Direct Lenders

Another term you may encounter is "direct lender." A direct lender simply means a lender that originates its own loans – either with its own funds or borrowed funds.  It can therefore be either a mortgage banker or portfolio lender.  It does not, therefore, function as an agent for a wholesale lender. Direct lenders are inevitably retail lenders as well because they do not involve third parties or middlemen in making loans to consumers.

Correspondent Lenders

A final term you may hear is "correspondent lender".  Whereas some types of lenders are distinguished by the process leading up to the loan, correspondent lenders are defined by what happens after the loan is issued. Correspondent lenders work with an investor, called a sponsor, who purchases any mortgages they make that meet certain criteria. Often, this is either Fannie Mae or Freddie Mac, in their roles as the major U.S. secondary lenders.

Correspondent lenders earn their money by collecting a point or two when the mortgage is issued.  Immediately selling the loan to a sponsor pretty much guarantees they'll make money, since the correspondent no longer carries the risk for a default. However, the sponsor may decline the loan if it turns out not to meet the sponsor's standards, in which case the correspondent must either find another investor or carry the loan itself.