It’s said that a home is one of the biggest purchases that you’ll ever make—and there’s a corollary to that, which is that a mortgage loan is probably one of the biggest loans you’ll ever take out. It’s one of the most confusing too, with phrases like “secondary market” and “portfolio lender” suddenly showing up on the scene. One way to think about it may be to think of three different types of lenders you can go to for your loan:
The trend has been towards consolidation in the mortgage industry. In 2007, three banks—Wells Fargo, Bank of America, and J.P. Morgan Chase—did about one-third of the new mortgage lending in the country; for the first half of 2010, they did more than one-half, according to industry statistics quoted in the Wall Street Journal. Together with the #4 and #5 lenders, GMAC and Citigroup, you’ve got a group of “big banks.”
Since the banks make a lot of mortgage loans, they’re usually pretty easy to work with in terms of guiding you through the process and the paperwork. Also, if you need a million-dollar loan, the big banks are the place to start. You can shop around on rates, but you’ll generally find that all of these five will have the same requirements for approving you, in terms of how much money you should make to get a certain loan, how much insurance you need to buy, etc. The reason? They’re all following guidelines set by Fannie Mae, a federally established organization set up to buy mortgage loans once they’ve made them. They’re all reading the same playbook.
Why would a bank sell a mortgage loan? It’s less risky for the bank. If I lend you $20, and then I turn around and sell the right to collect that debt to my friend Fannie, I’ve got my money back, and Fannie is the one running the risk that you don’t repay. Since I know I’m not going to be on the hook, I’m happier to lend you the money. In fact, that’s the way it works: Since banks know Fannie will buy their mortgage loans (in jargon, Fannie “makes a secondary market”), they’re more likely to make mortgage loans—and help people get homes.
These smaller financial institutions are owned by their members, not by outside shareholders. As a result, they’re very focused on service. Also, since they don’t resell the mortgages they make, they have a little more flexibility about approving you based on your special circumstances. What’s more, credit unions sometimes offer very favorable mortgage rates! If you want to find a credit union to join, check out the credit union national association website at cuna.org.
Midsize Banks And Savings And Loans
A medium-sized bank (possibly your local bank) or a savings-and-loan (also known as a “thrift”) is, like a credit union, possibly going to hold onto the mortgage loans it makes instead of reselling them. The buzzword to look for is “portfolio lender”—the advantage to you is more flexibility in getting approved, and sometimes lower rates. Sometimes when credit is really tight—like in the winter of 2008 after Lehman Brothers collapsed—these lenders will say “yes” when everyone else says “no”.
Tell us in the comments: What have your experiences been with mortgage lenders? Have you used one?