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          Learn more about the NJ mortgage process with our educational resources for homeowners.

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        • What is a Mortgage?A mortgage is simply a lien that is put on a property by a bank or lender of money to assist a consumer to obtain funding in order to purchase that property.
        • Mortgage Pre Approval vs. Pre QualificationAs a technical matter is there are actually 3 levels of “Pre-Approval” available as a lead-up to your mortgage.
        • What Factors Go Into Qualifying for a Mortgage?There are four main categories that a bank will review when they qualify you for mortgage financing, otherwise known as the four pillars of qualifying: Income, Assets, Credit, and Debt.
        • What is PMI Insurance?Private Mortgage Insurance (PMI) is quite simply an insurance policy that protects the mortgage lender in case of default on the mortgage.
        • New Jersey Mortgage Application ChecklistBeing fully prepared leading up to your application can prevent a lot of troubles and tribulations, which can be detrimental and emotionally taxing especially after you’ve gone to contract on your new home.
        • What Is The Minimum Down Payment For a House in NJ?Depending on your circumstances you may be looking to get into a property for the least amount of cash possible.
        • What Are The Three Different Types of Mortgage Lenders?There are 3 different types of lending companies that originate mortgage loans. Banks, Brokers, and Mortgage Bankers.
        • What Determines Mortgage Rates?A variety of factors lend their hand in the determination of where a particular lender will be on rates.
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NJ Mortgage Resources Background | Different Types of Mortgage Lenders

What Are The Three Different Types of Mortgage Lenders?

Understanding Types of Lenders

There are three different types of mortgage lenders that originate mortgage loans: Banks, Brokers, and Mortgage Bankers.

Any discussion of the different types of mortgage lenders however must first start with a discussion of Fannie Mae (FNMA) and Freddie Mac (FHLMC). Fannie Mae was created as a federal agency by the U.S. Congress in 1938 to ensure adequate liquidity in the mortgage market regardless of economic conditions. Freddie Mac was created in 1970 to help expand the secondary market. Both agencies are still overseen by the government and provide the lion’s share of liquidity in the US mortgage market today. They also set the standards and qualifying guidelines by which most of the conventional mortgage market operates today. Ultimately, around two-thirds of all conventional mortgages in the US are owned by Fannie and Freddie.

To break this down a bit further, after your closing your loan is essentially split into 2 parts. There is the fixed income security instrument (the promissory note) and the servicing rights. Just because your loan servicing may be handled by a bank or servicing company, the odds are the “Note” is held by Fannie or Freddie.

Banks

Most banks will have their own origination staff and originate their own mortgages. They also may choose to maintain the servicing of the loans that they originate after closing. It is common however, that a good portion of the Notes in the servicing portfolio may be held by Fannie and Freddie. Banks generally will underwrite their own loans under the guidelines of Fannie Mae and Freddie Mac. They may also choose to keep a certain portfolio of loans for a target market that they are pursuing. In these cases, they may have their own set of guidelines that they underwrite to with the understanding that these loans will never be sold to the agencies. Due to the volatile economic nature of mortgage banking many banks also may choose to source out some or all of their mortgage originations to mortgage bankers and brokers to avoid the overhead that comes from running a large origination, processing and underwriting staff.

Advantages of Banks:

  • May originate loans to keep in their portfolio thereby offering better rates or more flexible terms on some limited product lines.
  • In house underwriting and closing departments which can potentially lead to quicker turn times and efficiencies.

Disadvantages of Banks:

  • Mortgage banking is just one of many sources of revenue for the banks which many times can lead to a lack of resources, understaffing and inefficient operations since other departments may receive priority attention from corporate.

Brokers

Brokers, who are selling their loans to the banks, will take the bank’s rate, add in their mark-up, and that will be the final rate to the consumer. Depending on the broker and the type of loan, that mark-up can equate to anywhere from one to five points, with the average being 1 ½ to 2 points. Generally, government mortgages such as FHA and VA will have a higher markup. This is because there is a bit more work that goes into these for the broker and they also know unfortunately that consumers of these types of loans generally are less likely to shop.

Generally, brokers have access to very competitive rates from the bank on the wholesale side since they do not cost the bank any overhead. All that the broker does is add in the cost of his own overhead to the rate when they price. Since the broker will usually carry quite a bit less overhead than the larger banks this could potentially result in the smaller brokers having a lower rate than the large banks. Be careful though, as these lower rates may result in a slower turn time for approval on the loan, increased documentation, and a reduced service level. This is because the broker has to go back and forth with the final lending institution to get authorization on everything, which can eat up valuable time when you are trying to meet a closing date.

Advantages of a broker

  • Access to a large number of lending institutions and can shop for the best rates.
  • Smaller company which can lead to higher efficiency and more personalized customer interaction
  • Must disclose how much they are making on the Closing Disclosure
  • Business is focused solely on mortgage originations which can lead to greater efficiency and customer service levels with the right company.

Disadvantages of a broker

  • No in house underwriting so underwriting questions and decisions can take longer
  • Less overall control of the origination and closing process since they rely on the bank to answer questions about guidelines, closings, and anything else that may impact the back end of the transaction.

Mortgage Bankers

Mortgage bankers are a bit of a hybrid between banks and brokers. Like a bank, they generally have their own underwriters on staff and will originate, process, underwrite, and close the mortgage application in-house. It is only after the closing that they will sell off the securitized note and servicing of the loan to earn their revenue. Unlike a bank and like a broker, however, they can choose from various banks and secondary market options to make sure that they are getting access to the best rates for their clients. In fact, in some cases, mortgage banking companies will sell directly to the agencies cutting out the banks altogether.

Advantages of a Mortgage Banking Company

  • Access to a large number of lending institutions and can shop for the best rates
  • Business focused solely on mortgage originations which can lead to greater efficiency and customer service levels with the right organization
  • In house underwriting and closing departments which can lead to quicker turn around times and higher likelihood of meeting closing dates

Disadvantages of Mortgage Banking

  • Limited or no access to banks proprietary portfolio products which may be a disadvantage for the client looking for a unique product
  • No requirement to show what they are earning on the transaction since the loan is sold and revenue generated post-closing

Have more questions relating to the different types of mortgage lenders?

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Resources

  • What is a Mortgage?
  • New Jersey Mortgage Application Checklist
  • Mortgage Pre Approval vs. Pre Qualification
  • What Is The Minimum Down Payment For a House in NJ?
  • What Factors Go Into Qualifying for a Mortgage?
  • What Are The Three Different Types of Mortgage Lenders?
  • What is PMI Insurance?
  • What Determines Mortgage Rates?

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