There are basically two types of lenders: direct/portfolio lenders and those who act as conduit to various agencies.
Loan brokers have relationships with more than one lender and originate loans as independent contractors, but do not usually fund loans themselves; they evaluate your situation and determine which of their lenders has the best loan and rate on your behalf. The lender funds the loan and you make your payment directly to them.
Agency loans have the best rate and terms, normally 30 year fixed; they allow you to buy with less than 3.5 percent down, VA and USDA) allow zero down. These loans are Veterans Administration (VA), Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and the two conventional agencies, FNMA and FHLMC. Each agency has very comprehensive underwriting guidelines which determine which borrowers and properties will qualify for financing. There are many instances where a borrower will not qualify or the property does not meet the guidelines; examples are condominiums with a high percentage of investor owners, straw bale homes, some manufactured homes, and earth homes. Agency loans are underwritten with computer programs, which sometimes results in denials of loan requests from borrowers with unusual circumstances or hard-to-verify income.
Direct/ Portfolio loans are made from banks or other savings institutions own funds that were generated from their depositors. They are free to make their own underwriting rules and can lend on properties that don’t meet the agency’s requirements; these loans require a minimum of 20 percent down payment. Their underwriters have more latitude to make exceptions or use common sense to approve a loan. These loans are adjustable loans, which allow them to adjust the rate upward if their cost (the interest they have to pay their depositors) goes up in the future. Some offer loans that are fixed for a period of time (3, 5, 7 years) and then change into an adjustable for the balance of the 30 year term. Most Direct/ Portfolio lenders also offer agency loans; however, some are too quick to move an unusual or difficult agency loan to an in-house loan product.
In most cases, you’ll be better off working with an experienced and competent mortgage broker. They can quickly determine which agency loan best meets your requirements and then shop between their lenders for the best rate and fees on your behalf. The loan processing package that they create will be accepted by all their sources, so you don’t have to put in multiple applications and provide documentation multiple times. If your loan request does not meet the agency requirements, they can shop their lenders who offer direct/portfolio financing or alternative documentation loans, such as lenders that use bank statements instead of tax returns to determine a self-employed person’s income.
A competent mortgage broker can save you time and money; it’s the best choice for most buyers.
Steve Setka is an exclusive buyer’s agent with Keller Williams Realty in Durango and a licensed mortgage originator. He can be reached at 903-7782 or Steve@DurangoRE.net.