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Applying for a mortgage loan?

No lender controls the money, so where do you go?
No lender controls the money, so where do you go?
Photo by Jeff J Mitchell/Getty Images

You don’t have an inheritance, a rich uncle, lottery winnings or extra cash laying around and have realized you need a mortgage loan to fund your purchase or refinance transaction. The question for many is where and how do you apply for a mortgage? Consumers are bombarded with advertising coming in all directions, yet the question is more difficult than you may think.

The trick is understanding basic fundamentals as well as the many myths associated with obtaining affordable mortgage money. More important is understanding the stress associated with the process so you can manage a successful transaction which will allow you to actually live in the house you are purchasing or refinancing!

Myths

Mortgage money is part of our financial system and there is not one lender or some type of consortium in the back room making their own money. It is available based on your access to the financial market. The market fluctuates based on numerous factors but in essence you can obtain any rate you desire, “as long as you are willing to pay for it.” However, a more realistic paradigm is understanding mortgage money is available based on market conditions. It is not influenced by lenders. Therefore each day, the market determines what a “reasonable” rate is. That is true, even though lower rates are available assuming you are willing to pay more. On the contrary if you want to pay less than market rates, you can accept a higher rate.

“Low rates don’t mean a thing if you can’t get funding”

While it is important to obtain a competitive rate, for most it will boil down to who originates or takes your mortgage application. That is truly ground-zero in the battle of who will get your business. Therefore, ii is important to understand origination sources as well as their differences. Based on sheer competition, originators will proclaim they are better than other sources. That is why with all the origination or distribution points available to consumers there is not a distinct price variance from Originator to Originator? The customer is in total control of that decision; once they understand lenders do not set mortgage rates.

Local Banks

A typical source of mortgage originations is your local bank. Because their regular business is dealing with money, you would think they would grab all the business? While they do have a direct funding source in the form of deposits and lines of credit (warehouse lines), unlike years past their business strategy is not to tie up depositor cash funding mortgages. Unfortunately, like many Originators they may use their own money to fund mortgages, but they rely on the secondary market to sell their loans so their funding capacity is restored.

Because mortgage money is a neutral commodity many who fund mortgages have subsidiary companies which may appear to compete or conflict with their core business; but contrary, they understand distribution or having several sources of business is more important than limiting themselves

Mortgage Bankers

Mortgage Bankers approve mortgage applications and have the capacity to fund them. They use their line of credit to fund mortgage originators. The loans are quickly sold to the secondary market which restores the line of credit to fund more mortgages. Like local banks, they have many origination sources who provide them approved applications to be funded.

Correspondent's

Known as credit unions, insurance companies and companies which make consumer loan, their mortgage
Application are funded from their line of credit. They quickly sell their funded applications to mortgage
Bankers or direct banks. Similar to lenders, they have the ability to make loans direct through their line of
Credit (warehouse line). Correspondents can be defined as having direct consumer lending as part of their
business strategy, but for mortgages; they originate for mortgage bankers. Similar to mortgage brokers,
Correspondent’s may sell their loans to several different Mortgage Bankers or Direct Lenders.

Mortgage Brokers

Traditionally, Mortgage Brokers do not have a direct funding source for their applications. Instead they rely on establishing relations with Direct Lenders, Mortgage Bankers and even Correspondent’s for their funding source. Their popularity is based on numerous choices they can provide their customers. Because they rely on others to approve and fund their mortgage applications they put more emphasis on service and the ability to handle complex transactions.

Bottom-line

Because mortgage money is generic, the origination source of your application is perhaps the biggest decision a consumer will make.

Direct lenders, Mortgage Bankers, Correspondents and Mortgage Brokers aggressively compete for your business. Price being similar or justified; each has distinct advantages as well as disadvantages. For some consumers a big name is important. For others, dealing with someone who has the professional expertise is more important. It will boil down to the Originator who provides the professional representation you are seeking and who has earned your business.

Next up: Pre-Qualified versus Pre-Approval