Choosing The Right Lender For Homebuyers with No Overlays
This guide covers choosing the right lender for you with no overlays on government and conventional loans. The mortgage industry underwent major changes after the 2008 Real Estate and Mortgage Meltdown. However, borrowers need to realize that not all lenders have the same lending guidelines on government and conventional loans, says Ronda Butts, a dually licensed realtor and loan officer at Mortgage Lenders For Bad Credit:
The sub-prime mortgage lending sector of the mortgage industry went extinct. New mortgage regulations went into effect. Before these changes in new mortgage regulations, applying for and getting approved for a home loan was very simple.
Most homebuyers can go to their local banks or any mortgage company and get instant mortgage loan approval. Non-QM Loans made a comeback. Mortgage Lenders For Bad Credit introduced bank statement loans for self-employed borrowers. This article will discuss choosing the right lender with no mortgage overlays. In the following paragraphs, we will compare the various types of lenders and go over choosing the right lender for homebuyers with no overlays.
Choosing The Right Lender: Non-QM And Portfolio Mortgage Lenders
No income documentation/verification was extremely popular; almost all lenders had the same products. You could qualify with any bank or mortgage company if you qualified with one lender. However, this is not the case now.
Many mortgage lenders offer mortgage loans, but not all have the same lending requirements. Choosing The Right Lender For You is one of the greatest challenges you as a borrower will face if you have less-than-perfect credit, lower credit scores, and higher debt-to-income issues.
The good news is that just because one lender may say no does not mean that you cannot qualify for another lender. That is why choosing the right lender for you is extremely importantIn this blog, we will discuss the topic of choosing the right lender for you, and we will start by explaining the types of mortgage lenders.
Types of Mortgage Lenders for bad credit
Direct mortgage lenders use their funds to originate and fund the mortgage loan. Banks, credit unions, and mortgage bankers are all direct lenders. Direct mortgage lenders may service your mortgage loan. Or may decide to sell the servicing rights to a third-party company. Although direct mortgage lenders use their funds to fund the loan, most direct lenders package up the loans they fund and sell them on the secondary market. Not many lenders will hold a 30-year fixed-rate mortgage loan on their books. There are many advantages to working with a loan originator or a direct lender versus a mortgage broker.
Mortgage Brokers Versus Direct Lenders
The direct lender has control of their files whereas, unlike a mortgage broker, who brokers loans out to wholesale mortgage lenders in place of a commission. Control is limited. This is because mortgage brokers do not have control of the underwriting department of the actual direct lenders.
Loan Officers of direct lenders can have direct contact with the lender’s processing, underwriting, quality control, and closing department staff. However, the disadvantages of choosing a direct lender versus a mortgage broker are that you will be limited on just the product that the direct lender has to offer.
Most direct lenders have mortgage lender overlays. Lender overlays are mortgage guidelines on top of the minimum federal mortgage lending guidelines required by FHA, VA, USDA, FANNIE MAE, and FREDDIE MAC. This is when choosing the right lender for you becomes extremely important. We will cover overlays of direct lenders in a later paragraph.
Choosing Mortgage Brokers As Your Lender
Mortgage brokers are not direct lenders and do not lend with their funds. Mortgage Brokers are third-party salespeople with a wholesale lending relationship with a direct lender. The role of a mortgage broker is to get borrowers who require a mortgage loan and send the file to the direct lender. The direct lender then pays the mortgage broker a commission, called a yield spread premium, for the referral of the borrower. John Strange of Mortgage Lenders For Bad Credit explains the comparison between a mortgage banker and a mortgage broker:
A mortgage broker is a middleman who may represent the mortgage loan products of many lenders. The broker aims to match you with the loan product that best meets your needs at the best price. Once your loan is approved, you usually deal directly with the loan originator or mortgage service provider. Mortgage brokers need to be licensed just like direct mortgage bankers.
One advantage mortgage brokers have over mortgage bankers is that they do not use their funds to fund a borrower’s mortgage loan. Mortgage brokers have broker relationships with direct wholesale mortgage lenders. Brokers are not limited to one specific mortgage lender.. A typical mortgage broker company may have six or more wholesale relationships with direct mortgage lenders. Suppose a borrower does not fit a particular lender’s credit requirements to qualify for a mortgage loan. In that case, the mortgage broker can refer the borrower to a different direct lender interested in approving the loan application.
Can Borrowers Go Directly To Direct Lenders Mortgage Brokers Has A Relationship?
The answer to the above question is yes, only if you were to go to them directly first. Suppose you already are dealing with the mortgage broker and cancel the broker relationship and decide to go straight with the direct mortgage lender. In that case, it is up to the direct lender on how they will treat the situation.
Most mortgage brokers will not initially tell you the direct lender’s name. But when you get the disclosures and docs, you will see the name of the direct lender that the mortgage broker has referred you to. Some borrowers feel they will save a lot of money by bypassing the mortgage broker and going straight to the wholesale mortgage lender.
However, if you were to deal straight with the direct lender that the mortgage broker has a relationship with, the chances are that you will be dealing with the retail division of the direct lender. The pricing might be similar to if you were dealing with a third-party mortgage broker.. The disadvantages of dealing with brokers may be that you may have higher fees and costs than a direct lender. However, brokers offer invaluable services to borrowers with challenged credit and higher debt-to-income ratios.
Preferred Lenders By Builders And Lenders Owned By Real Estate Companies
The mortgage business can be very profitable. Many national home builders are getting into the mortgage business by opening their own companies. Or by developing a relationship with mortgage companies and labeling them preferred lenders of home builders. The same goes for real estate companies.
Larger real estate companies are starting their own mortgage business. This holds true even though the mortgage industry is extremely regulated by the newly created Consumer Protection Financial Bureau, CFPB
The CFPB does not mess around and is always on the watch out for mortgage compliance and rules violators. The way the CFPB works is that they will go after the larger nationwide mortgage companies. Since the mortgage industry is full of thousands of mortgage regulations, the chances are that they will find something wrong with any mortgage company’s operations. A slap of the wrist is not ever heard of with the CFPB.
Mortgage Compliance By Lenders
The CFPB is serious: The agency has no problem finding a mortgage company for tens of thousands, hundreds of thousands, or even millions. Most mortgage companies, whether mom-and-pop mortgage brokers or large national firms, will not appeal a ruling by the CFPB and pay the fine. There are issues when dealing with mortgage companies associated with home builders or real estate companies.
Most of the relationships between builders and realtors of preferred lenders referred by builders and realtors are illegal and blatant violations of RESPA, but the practice continues. Many home buyers have their lenders and are already pre-approved with them, whether they are bankers, mortgage brokers, or direct lenders before they visit a builder or real estate office to shop for a home.
Homebuyers who have pre-approval letters from their loan officers prefer to use the loan officer who already pre-approved them but, more often than not, are forced to change loan officers when they visit a home builder. This is because the builder will only offer a builder’s incentive if the home buyer uses the Home Builder’s Preferred Lender.
RESPA Violations And Mortgage Rules And Laws
This practice is often illegal and violates the Anti-Steering rules of RESPA. Choosing the right lender is crucial Choosing the right lender as a preferred lender of the builder is not always the right move. You cannot steer a borrower to a preferred lender and offer an incentive only if the borrower goes to one particular lender. Builders do this and are often successful by offering buyers a substantial incentive such as a $5,000 to $10,000 builder’s incentive towards options on the new construction home or closing costs credits. This incentive by the home builder is only valid if the homebuyer uses the builder’s preferred lender. Some builders will offer the incentive to a home buyer’s lender of choice if the builder’s preferred lender cannot do the loan. But other builders will not pass the builder’s incentive to another lender even if the builder’s preferred lender denies the buyer’s mortgage loan.
Advertising And Kick-Back Mortgage Guidelines
MSAs is short for Marketing Service Agreements. Marketing Service Agreement is a business agreement between a mortgage lender and a real estate company. A lender will lease office space for a premium by the real estate company, and the realtor will steer or recommend home buyers represented by real estate agents of their office. The CFPB is cracking down on this practice, and many larger mortgage lenders have terminated their Marketing Service Agreement programs because they fear they will get fined by the Consumer Protection Financial Bureau for RESPA Violations. Kickbacks are not allowed and violate the Real Estate Settlement Act or RESPA.
Overlays Are the Main Reason When Thinking Of Choosing The Right Lender For You
Any borrower with an 800 credit score, a stable income, and a 20% down payment will get approved for a mortgage loan with any lender. However, for those who have lower credit scores, gaps in employment, high debt-to-income ratios, outstanding collection accounts, judgments, tax liens, charge-off accounts, bankruptcy, deed in lieu, foreclosure, short sale, or recent late payments, the choices will greatly narrow and choosing the right lender will be a very important decision.
Choosing The Right Lender With Overlays Versus Agency Guidelines
Borrowers need to due their due diligence in choosing the right lender. Most lenders have overlays which are additional lending requirements that they implement that are on top of the minimum lending guidelines imposed by FHA, VA, USDA, and FANNIE/FREDDIE. For example, most lenders will not hire a borrower with a 580 credit score. This holds true even though HUD minimum credit score requirements are 580 FICO to qualify for a 3.5% down payment FHA loan. This higher standard on the minimum credit scores a lender requires is called a perfectly legal lender overlay. The bottom line is that just because you do not qualify by one lender does not mean you do not qualify with a different lender. Choosing The Right Lender For You is important. Every borrower with credit issues should do their due diligence to ensure they meet the minimum mortgage guidelines on the loan program they intend to apply for. Make sure you ask about the lender overlays when choosing the right lender.
