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Learning About Mortgage Lenders

Lending companies come in all shapes and sizes. Perhaps the first lender any of us ever used was the "Bank of Mom and Dad." Whether we were trying to buy a video game player, a stereo, or even a car, the parental vault was cracked open to help make it happen. Rates were great. We could borrow money with little or no interest. Perfect!

Joking aside, we are facing bigger stakes now: loans for homes. Our needs could be to:

Purchase a home
Refinance an existing mortgage
Open a home equity line of credit (HELOC)

For any of those choices, there are many companies out there — banks, mortgage brokers, and e-lenders — willing to help you find a loan. It's not because they think you'll be happy in that Craftsman or that two-bedroom condo in the coolest part of town. It's because they make money lending you money. It's called interest (and fees). That's why it's in your best interest to get the lowest rate possible, and the best terms, which are usually not one and the same.

Know Your Lenders

Before you get the low-down on amortization schedules or learn about newfangled 50-year notes, it helps to understand your choices when it comes to types of lenders. Most fall into one of four categories:

Internet lending resources
Mortgage brokers
Mortgage bankers
Banks and savings and loans

1. Internet Lending Resources

Internet lending resources have a wide presence on the Web and not all actually lend money, although it might appear that way. They consist of direct lenders, lending marketplaces, and content sites.

Direct Lenders
Direct lenders lend their own money and include both traditional and online lenders. Many traditional banks provide helpful online information, including rates, calculators, and educational content. Online lenders, on the other hand, offer loans directly through the Web. They can offer very competitive rates and give you personalized help via phone, e-mail, and even online chat — but you probably won't meet anyone face-to-face during this process. So, if you are comfortable transacting online and want a low rate, this option is worth investigating. Keep in mind that some mortgage bankers offer loans both online and in local sales offices.
Lending Marketplaces
Lending marketplaces let you fill in one form and then quickly compare quotes from several banks (usually around four). These services make money by charging the banks a fee for the chance to compete for your business. Because banks know you are comparing them side-to-side with others, they offer competitive rates. Once you have filled in your information, they will contact you — usually by phone — to begin the process of finding a loan that fits your needs.
Zillow Mortgage Marketplace
Zillow Mortgage Marketplace is a new offering designed to bring borrowers and lenders together in an open marketplace that is secure and anonymous, and free to borrowers as well as to lenders, after a one-time administrative fee. Borrowers submit a request for a loan quote with criteria, and confirmed lenders respond with quotes. Borrowers do not need to supply a name, address, phone number or Social Security number to lenders. Only lenders who have registered, been confirmed as a lender and have created a public profile on Zillow may respond to the requests.
Since borrowers are anonymous in the process, lenders cannot contact borrowers.
Lenders compete on price and customer service, and build reputations through public feedback on Zillow. They are required to disclose all fees and closing costs up front.
Content Sites
Content sites focus on offering educational information, content, calculators, and tools. These sites usually make money from advertising and partnerships. Their partners frequently include direct lenders and lending marketplaces.

2. Mortgage Brokers

Mortgage brokers are like a matchmaking service since they match you, the borrower, with a lender. They review your personal financial information and look over an array of lenders to try to fit you with one who will give you the best rate and terms. Mortgage brokers usually make their money from the lender since they are bringing a client (you) to them, but fees may also be charged to the client. The advantage is choice since the broker will have lots of suitors to match you with; the disadvantage is that once the match is made, they're out of the picture and you continue the dance with the lender you were matched with.

3. Mortgage Bankers

Mortgage bankers (also called mortgage companies) may or may not be affiliated with a bank and their specialty is in providing mortgages. Period. They originate mortgage loans, which means they prepare loan documents, perform credit checks, inspect and appraise the property. Once they issue you a loan, it is then sold to a secondary lender, such as Fannie Mae and Freddie Mac. This is very common. A secondary lender is in the business of buying existing mortgages from the primary lender to keep the pool of mortgage money moving. This creates fierce competition on the primary level, which in turn keeps rates down for consumers.

4. Banks and Savings & Loans

Banks and savings & loans are usually "part of the neighborhood" and make their money from the funds generated from their customers who have checking and savings accounts at their bank or from other services they offer. They issue mortgage loans and usually keep control of the loan, but sometimes sell it off to secondary lenders.

Other types of lenders include finance companies and credit unions. Whichever lender you use, the bottom line is to do your homework and don't be afraid to ask questions.

Want More Information?

The two big purchasers on the secondary lending market in the U.S. with the homespun names, Fannie Mae and Freddie Mac, both have free content and tools about lending and homeownership. Visit www.fanniemae.com and www.freddiemac.com.

Both the Federal Housing Administration and the Veterans Administration have several loan programs designed to encourage homeownership.