So you’re ready to buy a house. Unless you have the money to pay for the house in full, you’re probably going to need a mortgage lender. These are individuals or companies that loan you the money to buy real estate, also known as the mortgage loan. Mortgage lenders also have the responsibility to ensure you can pay back the money that you borrow.
Mortgage Lender Basics
The role of a mortgage lender is to lend money for buying property. The lenders can be banks, credit unions or private individuals. Some mortgage lenders partner with the U.S. Department of Housing and Urban Development, which provides programs that help people buy homes. Typically, HUD insures the mortgages people in their programs get from the lending partners. State governments run similar programs specific to their states and partner with mortgage lenders as well.
Government-sponsored agencies like Fannie Mae and Freddie Mac also partner with mortgage lenders. They do not lend people money but instead secure or buy mortgages from mortgage lenders, thereby replenishing their cash flow and enabling them to continue to provide loans to others.
Verifying Repayment Ability
Before they can give out a mortgage, lenders also play the role of qualification checker. In response to the housing bubble bursting in 2008, the Consumer Financial Protection Bureau adopted the ability-to-repay rule that went into effect in 2014. This rule is designed to help prevent borrowers from taking on a risky loan by holding mortgage lenders accountable for ensuring that the borrower has documented proof that he can repay the loan.
This includes getting documentation of income, job status and assets. Lenders must also verify that a person’s credit history is in good standing. They must also confirm that a person has a debt-to-income ratio of no more than 43 percent. Once all these qualifications are verified, the mortgage lender can issue a mortgage.
Retail Lender Versus Wholesale Lender
There are two types of mortgage lenders and one does not take on as big a role in the lending process as the other. Both types, however, can come from the same lending institution be it a bank, credit union or private company. Some large lenders have a division of each.
Retail lenders counsel the borrower through the loan process, process the loan application, set the loan terms, process the loan and conduct the underwriting -- the assessment process for verifying the borrow is qualified to receive the loan. They also come to the closing. And, most importantly, they fund the loan, basically putting up their cash to pay for the property now while the borrower pays them back in a set amount of time.
Wholesale mortgage lenders on the other hand push off some of that responsibility to mortgage brokers. Wholesale lenders only play a role in underwriting and funding the loan, locking loan terms and showing up at closing. They leave the processing of paperwork and counseling of customers to the broker.
Mortgage Broker Basics
Mortgage brokers can be confused with mortgage lenders as they arrange the loan. They counsel the borrower, process her application and then find her a mortgage lender. They do not actually lend you the money.
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