You have numerous options when it comes to securing your mortgage. Unlike your grandmother, who likely relied on her local bank or, in later years, a savings and loan or credit union, you might consider a wider range of options. These could include banks, credit unions, mortgage bankers, or mortgage brokers.
Understanding the different lending channels can greatly benefit you, even if the industry’s historical development isn’t crucial to your decision-making process.
It’s essential to recognize that no lender has exclusive access to funds. Despite some claims, all lenders offering conventional mortgages draw from the same sources: Fannie Mae, Freddie Mac, or private investment funds. These funds acquire money from individual and institutional investors, such as pension funds, and purchase bonds backed by non-conforming mortgages. If you have a 401K or IRA with diversified investments, some of your money may already be invested in mortgages.
Keep in mind that a mortgage transaction involves two parties: you, the borrower, and the institutional investor seeking to invest large sums in safe, high-yielding investments. Your mortgage represents an excellent investment statistically, but pension funds aren’t in the business of direct lending; they prefer to invest in existing loans.
Mortgage companies and banks serve as intermediaries, but you can’t secure a mortgage without them. The key takeaway is that all mortgage funds ultimately come from the same sources.
When applying for a mortgage, you might work with a mortgage broker, a mortgage banker (often called a mortgage lender), or a bank or credit union. The classification of these entities depends on the specific functions they perform in the lending process.
Understanding Mortgage Functions
To grasp how all parties in the mortgage process interact, you should familiarize yourself with the functions involved in creating your mortgage and who performs them.
Origination:
Your mortgage journey begins with gathering your information, receiving advice, and completing your application. While this can be done online, working with an ethical, competent mortgage advisor can be beneficial without additional cost. This professional, regardless of their title (loan officer, mortgage specialist, advisor, or planner), may work for a broker, mortgage lender, bank, or credit union. They’re paid by the lender who ultimately funds your mortgage.
Processing:
A processor, employed by either the lender or broker, verifies the originator’s findings and prepares your loan application to meet underwriting guidelines.
Underwriting:
An underwriter reviews your application and supporting documents to ensure compliance with lender guidelines. They decide whether to approve or decline your loan and may set conditions for closing.
Funding:
Once your loan is approved and you’ve signed the final documents, the lender funds your loan by sending the money to escrow.
Pooling:
After making multiple loans, lenders pool them together and sell them to institutional lenders, typically Fannie Mae or Freddie Mac. This process is usually invisible to you as a borrower.
Securitizing:
Another behind-the-scenes process where Fannie Mae, Freddie Mac, and investment funds obtain money to buy mortgages. They borrow from institutional investors by issuing bonds or mortgage-backed securities. These investors purchase bonds that promise repayment using income from mortgage payments in the pool.
Interestingly, if you own a 401K with investments in a mutual fund, it’s likely that some of your money is invested in mortgages.
Remember, whether you work with a mortgage broker or a direct lender, the organization funding your loan pays for the origination process. Your choice of mortgage source doesn’t affect this payment structure.
Understanding Mortgage Functions by Player
To help you grasp how different entities handle various mortgage functions, consider this breakdown:
| Function | Mortgage Broker | Mortgage Lender | Bank / Credit Union | Investor / Institutional Lender |
|---|---|---|---|---|
| Player: | Rocket Mortgage | Freedom Mortgage | Wells Fargo / Alliant Credit Union | Fannie Mae / Pension Funds |
| Origination | Yes | Occasionally | Occasionally | No |
| Processing | Yes | Occasionally | Occasionally | No |
| Underwriting | No | Occasionally | Yes | No |
| Funding | No | Occasionally | Yes | No |
| Bundling/Pooling | No | Occasionally | Yes | No |
| Securitizing | No | Rarely | Occasionally | Always |
This table illustrates that you can apply for your loan through a broker, mortgage lender, or bank, but not directly to entities like Fannie Mae. Your loan may be processed by any of these except institutional lenders. Underwriting and funding will be handled by either a mortgage lender or a bank.
Regardless of where you obtain your loan, you’ll pay for each of these services, either through your interest rate, up-front costs, or likely both.
Your loan’s journey might look like this:
- Originated and processed by your broker
- Underwritten and funded by a mortgage lender
- Sold immediately to a banking institution
- Bundled with other mortgages
- Sold to Fannie Mae, Freddie Mac, or an investment fund
Alternatively, if you work with a direct mortgage lender qualified to sell to Fannie Mae, they might handle origination, processing, underwriting, funding, and bundling in-house.
In either scenario, the same number of professionals work on your loan, and they all receive compensation for their services.
As you navigate the complex world of mortgages, remember that regardless of which path you choose – be it a mortgage broker, a direct lender, or a bank – the fundamental processes remain the same. Your decision should be based on which option provides you with the best combination of rates, terms, and service. While the behind-the-scenes operations may vary, your focus should be on finding a trustworthy, competent professional who can guide you through the process, explain your options clearly, and help you secure the most suitable mortgage for your unique financial situation. By understanding the roles of different players in the mortgage industry and recognizing how their functions are distributed, you’re better equipped to make an informed decision and navigate your home-buying journey with confidence. Ultimately, having a clear grasp of this process helps you ensure that you are getting the best possible terms for your financial situation.
