There are many places to get financing for your home purchase. In addition to the traditional mortgage lenders (commercial banks, savings & loans, credit unions) homebuyers can get financing from mortgage companies.
Many people are familiar with commercial banks, credit unions and savings & loans, but what about mortgage bankers and mortgage brokers? What is their role in the mortgage lending process?
The traditional mortgage lenders get their funds primarily from two sources. They use their own deposits to fund most of their mortgage loans. Additionally, they generate funds for new mortgage loans by selling groups (pools) of their existing mortgages in the secondary mortgage market.
The secondary mortgage market consists of companies that buy loans from mortgage lenders and use the loans as collateral to sell securities to investors.
The largest players in this market are three government regulated companies, the Federal National Mortgage Association (FNMA), also known as Fannie Mae; the Government National Mortgage Association (GNMA), also known as Ginnie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac.
This secondary market was created so that lending institutions could make previously committed funds available to make more mortgage loans.
Quite often, a mortgage lender will sell a mortgage loan but retain the servicing rights, meaning the lender still collects the mortgage payment and pays the borrower’s taxes and insurance.
The term mortgage banker is somewhat misleading, because a mortgage banker doesn’t take deposits. The mortgage banker has a line of credit established with an institution, usually a commercial bank. The mortgage banker borrows from this line of credit in order to provide mortgage loans to consumers.
When the mortgage banker has enough mortgage loans, they are grouped together and sold in the secondary mortgage market. The money that is received from investors is used to pay off the line of credit and make new loans, and starts the cycle over again. Many mortgage bankers also choose to service the loans they originate.
Mortgage brokers, on the other hand, don’t lend money, but they do bring lenders and homebuyers together. When a buyer obtains the services of a mortgage broker, the mortgage broker takes the buyer’s application and processes it (checks employment verification and credit records, coordinates property appraisal and the title check).
The broker then works with a mortgage lender that will accept the loan application and provide the best terms for the buyer. If a lender (bank, S&L or mortgage banker) accepts the application, the lender will give the money to the broker who then gives the money to the borrower.
This process is called table funding. Once the money is given to the borrower, the broker has completed his/her obligation to the borrower and has nothing further to do with the mortgage loan. The loan is serviced by the lending institution that provided the money.
So what sets one institution apart from the other? Mortgage bankers and brokers are known for their ability to work with borrowers (especially those with special circumstances) because they shop the lending market to obtain a cost-effective loan that will accommodate the borrower’s needs.
Commercial banks and S&Ls also may be able to help homebuyers with special circumstances. The Community Reinvestment Act encourages these institutions to focus lending efforts in their communities.
If a bank or S&L decides to keep a mortgage loan on their books (portfolio loan), they can offer more lenient buyer and property qualification guidelines than the secondary market requires.
When deciding which lender to use, the type of lender is not as important as the service a lender can offer. A lender that can offer prompt, courteous service can make the home buying experience a little easier.
Also, shop for a lender that can offer an attractive interest rate. When comparing rates, ask the lender about the loan’s interest rate, based on zero discount points.
Lenders often charge the borrower discount points (one point being 1 percent of the loan amount), in order to lower the interest rate on a loan.
Avoid lenders that charge excessive fees. The best way to compare is to ask prospective lenders how much they charge as closing costs and ask if they can itemize them.
If an application fee is charged, make sure it is used to pay for an appraisal and credit report.
Compare other fixed lender costs (such as underwriting fee, document preparation fee and processing fees).
Many lenders don’t charge these types of fees. If you don’t have a property or a closing date selected, other costs (such as accrued interest, escrowed taxes and property insurance, and mortgage insurance) can only be estimated.
When shopping for a mortgage lender it pays to compare. As a homebuyer, it is your responsibility to decide which of these lenders would best suit your personal needs and provide the type of service that you are seeking.
– The mortgage and refinancing markets continue to respond positively to declining interest rates.
In the week ended June 2, the Mortgage Bankers Association reported that mortgage applications nationwide had increased 29.6 percent over the same week in 1994. The number of refinancing applications was up 62.3 percent over the same period in 1994.
Last year, the refinancing market was all but dead, after a huge bulge of refinancings in 1993.
Meanwhile, the average interest rate on 30-year fixed-rate loans held steady at 7.53 percent last week, the Federal Home Loan Mortgage Corp. said.
Freddie Mac said the rate on 15-year loans rose slightly, to 7.03 percent from 7.01 last week, while adjustable-rate loans were unchanged at 5.84 percent.
A year ago, the 30-year loan averaged 8.57 percent, the 15-year was at 8.07 percent and the adjustable loan was at 5.48 percent.
