Shopping for a mortgage can feel overwhelming. It’s intrusive because lenders require every detail of your personal and financial life to do their job. It’s complex because rate quotes and associated fees (also known as points) can be presented many different ways, plus rates change daily based on economic conditions. And it’s confusing because there are different kinds of lenders who all have a pitch as to why their model is the best.
First step is to choose the Mortgage Provider. There are three main sources for consumer mortgages. Armed with this knowledge, you’ll be ready to navigate the available information, and ask the right questions when you’re mortgage shopping.
These companies range from the biggest name-brand institutions down to smaller local banks and credit unions. They underwrite, approve and close loans for consumers, then either keep the loans on their own balance sheets or sell the loans to investment firms, Fannie Mae or Freddie Mac, who bundle the loans into mortgage bonds, or also known as mortgage backed securities (MBS).
Retail banks usually retain servicing rights, which means you would get your monthly mortgage statement directly from that bank, and the loan agent that handled your loan would remain your primary point of contact for all future inquires.
Advantages: Retail banks are usually a big brand or well-known local brand. These organizations can often be more flexible on loan approvals because they have the option to keep loans on their books, as opposed to selling the loans, which means more stringent underwriting. They also offer non-mortgage financial services like checking, savings, credit cards and financial planning, and they usually offer lower mortgage rates if you use them for additional services like a checking account.
Like retail banks, these companies underwrite, approve and close loans for consumers. They then sell the underlying loans to retail banks, investment firms, Fannie Mae or Freddie Mac, who bundle the loans into MBS.
Larger mortgage banks may keep servicing rights, so you’d get your monthly statement from the mortgage bank and retain your loan agent as primary contact for future inquiries. Smaller mortgage banks sell servicing rights along with the loans, which means you’d be contacting the new bank servicer for future inquiries.
Advantages: Your loan agent uses the many investors they sell to as a one-stop rate shopping process for you, and because they have their own underwriters, they still control the whole process from start to finish and can move very quickly.
These companies obtain loans for consumers through retail banks or mortgage banks. The loan is funded and usually also serviced by the retail or mortgage bank that the broker takes your loan to.
This model was quite popular in the past two decades leading up to the 2008 crash as big banks and mortgage banks outsourced the cost of sales forces to broker firms. But new stricter regulations have caused banks to want to control sales forces more tightly, so brokers are less prominent than they used to be.
Advantages: Mortgage brokers can rate shop for you across many banks, and lend on tough borrower or property profiles because of their ability to shop the profiles across many banks. Because regulators have made brokering a tough business post-crisis, the last standing brokers are usually highly experienced veterans.