Who's Your Lender?
Understanding little-known differences among mortgage origination companies will help you serve your clients better.
October 1, 2010
A lot of my friends in the real estate business come to me with this question: "Where can my buyers go to find the lowest interest rate?"
Considering that I spent more than a decade working as a loan originator, and years before that in real estate sales, you’d think I could give them a clear-cut answer. Maybe I would have, a few years ago.
But today, I tell these friends they’re asking the wrong question. Their prime concern should not be getting the lowest interest rate but rather finding a lender who’ll approve their customer’s loan.
A short time ago, a borrower with almost any credit profile could go into almost any mortgage broker and find a loan. All he or she needed was the motivation to buy. Clearly, this is not the case now. The current mortgage market and its guidelines are quite fluid.
That’s why you need to know the differences between the three basic types of mortgage origination companies: banks, brokers, and correspondents. Even with the creation of an overarching consumer financial protection bureau, each type of lender follows different laws about what must be disclosed and each is overseen by a different regulatory agency.
To help your customers get approved for a loan, you have to know the best place for them to go.
Banks. Though there are exceptions, these institutions typically have underwriters on staff and close loans with their own money and in their own name. Their employees receive a base salary, which can make for less pressure and aggressiveness.
But since they work banker’s hours, they might not be available if clients need something at 3 p.m. on Sunday. Banks don’t have to disclose yield (the additional profit created by hiking the interest on a loan above market rate). Banks often have niche products for borrowers with a unique purchase—for example, manufactured homes or home construction. Every bank will have its own minimum credit score requirement.
Brokers. These guys get a bad rap, but their business is very transparent in this market and they’re highly regulated. Under the recent Wall Street reform, the law pertaining to brokers is even more consumer-friendly. With respect to compensation, they can collect yield or an origination fee, but not both. They work on commission and make a little more than the bankers.
Brokers will compile your file and present it to a bank or other investor, and this can take more time since they’re shipping the file to a third party. They charge more fees and often have higher credit score requirements than banks due to a concept called "layering"—typically, a bank’s minimum credit score will be 20 or 40 points lower than that of the brokers who wholesale to them.
So if your customer’s credit score is below 620, he or she shouldn’t start shopping at a broker.
Correspondents. The company structure of correspondent lenders is almost a secret; even the brightest of people have a hard time knowing if they’re dealing with a correspondent. Rather than using their own money to extend mortgages, as banks do, correspondent lenders draw from their credit lines (often called warehouse lines).
Within days of closing, sometimes hours, they sell the mortgage. Their ability to lend is subject to their credit line limits. If they have more loans to close than they have funds, loans can be delayed or declined for no apparent reason to the borrower. Correspondents don’t have to disclose yield, but because layering is in effect, credit score requirements may be higher than at banks.
I’ll be the first to admit that it’s not easy to understand these differences. But that knowledge is crucial. If you or your clients don’t know if a lender is a bank, broker, or correspondent, just ask. And if the loan is declined, find out why. Know your customer’s financial profile and transaction needs, and learn about the lenders that are in your market.
Updated: November 30, 2020