Though the types of home loans prospective homeowners can receive are generally the same—conventional or government-backed—the lenders they may choose can vary. As you look for a home loan, you might wonder, what is a direct lender, and which is right for me? Let’s take a closer look.
What is a Direct Lender and is it Right for You?
Types of Loans and Types of Lenders
First, there are two primary types of mortgage loans: conventional and government-backed. Conventional loans are those underwritten to Fannie Mae and Freddie Mac, while government-backed loans include VA, FHA and USDA programs. Though mortgage companies offer these two primary home loan offers, there are different ways to access a conventional or government-backed loan. You can get a mortgage through a direct lender, a mortgage broker, or through your bank.
What is a Direct Lender Home Loan?
A Direct Lender originates, processes, underwrites and prepares loan documents all in-house. When you work with a loan officer at a direct lender, you’re working directly with the company that will approve your loan. Your loan application doesn’t have to be sent to various third parties for a partial or complete approval. Because your loan application stays at the lender, there are specific efficiencies achieved as your application moves through various stages of approval.
What is a Direct Lender Loan Process?
Your loan officer will review your personal situation and help you choose the loan program that meets your needs. You will provide your documentation to the loan officer, who will then hand your loan over to your processor. The processor prepares your loan file for a final approval, and orders out various third-party services and documentation needed to complete your file. Once complete, your application moves to the underwriter’s desk, who will make sure your application meets the guidelines for the prescribed loan program. When that determination is made, loan papers are printed and delivered to the settlement agent.
Is a Direct Lender Right for You?
Direct lenders have one primary product—mortgage loans. Direct lenders do not offer any other financial services that banks do, like savings or checking accounts, insurance, or mutual funds. Direct lenders also have the ability to select certain loan programs that are tailored to your specific situation. Your loan will be sold into the secondary market, but a direct lender has choices where the loan will be sent. This means a wider selection of loan program guidelines. For example, a direct lender can have multiple sources to sell your loan and some of these buyers can accept lower credit scores compared with other lenders. Simply put, there is more flexibility with a direct lender, and you can end up with a lower-cost loan.
What is a Mortgage Broker Home Loan?
Mortgage brokers act as a “middleman” between you, the borrower, and your ultimate lender. Mortgage companies work out marketing agreements with mortgage brokers whose job it is to find the mortgage company new loans. A mortgage broker is an originator, the individual who finds or “originates” a new loan application.
What is the Mortgage Broker Home Loan Process?
You will provide your initial documentation to your mortgage broker who will then shop for the right lender that provides the type of loan program that best suits your personal situation. A mortgage broker transfers your loan to your lender, and you will then work with the selected lender, along with your loan officer and loan processor at the mortgage broker company.
Is a Mortgage Broker Right for You?
The ability to shop around for the best deal is an advantage a broker has but it can also add to the cost of the mortgage overall. A mortgage broker is either compensated directly by you in the form of an origination fee or the broker is paid a fee by the chosen lender. Many times this compensation is a result of a higher rate or fee.
What is a Bank Home Loan?
A bank is a third choice and is the largest source of new loans originated each year. Borrowers may choose to work with their bank due to the familiarity and convenience of obtaining a home loan at the same place where they have their checking account, credit card or automobile loan. What banks don’t have, however, is the same level of flexibility a direct lender or mortgage broker can offer. Banks have strict rules on what they can and cannot do, and the loans they cannot offer.
What is the Bank Home Loan Process?
Your loan application at a bank is often transferred to a primary underwriting facility, and not actually approved at your bank branch. This can mean your application will be reviewed by someone completely unfamiliar with you and the location of the property you’re going to buy.
Is a Bank Home Loan Right for You?
Banks will typically have higher rates and fees than a direct lender primarily because they cater to a captive audience; their banking customers. Banks understand this dynamic and realize they do not have to compete on rate but instead depend upon a client’s loyalty to the bank. Finally, the loan officer you first work with at the bank isn’t licensed and often less experienced than say a direct lender who is a licensed loan officer with years of experience in the mortgage industry.
There are many different options when it comes to mortgage lenders. To find the best deal, including the lowest interest rate, lowest closing costs, and the best service, it makes sense to shop around. When you know what a direct lender is and how it compares to your bank or a mortgage broker, you’ll have the information you need to get the best possible home loan agreement.