When aspiring homebuyers begin researching mortgages, they quickly discover that there are multiple angles that they can use to approach the topic. Some begin by educating themselves about financial terminology. Some focus on exploring the various loan options available, discovering what they need to do to qualify for a home loan or developing a thorough understanding of the loan process. Although these are certainly topics worth studying, there’s another aspect of the mortgage scene that prospective borrowers sometimes overlook: the lenders. When it comes to home loans, what is the role of mortgage lenders? What do would-be homebuyers need to know about the organizations providing the loans?
Exploring the Role of Mortgage Lenders
BusinessDictionary.com defines a mortgage lender as a bank or company that lends money to borrowers to fund the purchase of real estate. It’s a simple definition that most people who are considering a real estate purchase are probably already familiar with. While it covers the basics, there’s certainly a great deal more to learn about mortgage lenders.
Retail Lenders Vs. Wholesale Lenders
What do prospective borrowers need to know about mortgage lenders? For starters, they’re not all the same. One distinction to be aware of is the one between retail and wholesale lenders.
As The Mortgage Professor explains, retail lenders are lenders who tackle the entire loan process. Sometimes called direct lenders, retail lenders connect with potential customers and advise them about their options, take loan applications, lock in loan terms, process loans, underwrite loans, and fund loans. In contrast, wholesale lenders leave many of the tasks involved in originating and processing a loan in the hands of mortgage brokers. Wholesale lenders have less interaction with the general public. Instead, they work behind the scenes to lock in terms, underwrite loans, and fund loans. While it may seem like retail and wholesale lenders are easy to tell apart, it can actually be difficult to categorize a lender as one or the other at times. That’s because many large lenders operate both retail and wholesale divisions.
Mortgage Lenders vs. Mortgage Brokers
When it comes to mortgage lenders and mortgage brokers, it’s easier to tell who is who. Where mortgage lenders hand out money to purchase homes, mortgage brokers don’t. Instead, brokers connect consumers with lenders. Aptly comparing mortgage brokers to matchmakers, Zillow points out that a mortgage broker reviews a would-be borrower’s personal financial information, considers the offerings of various lenders, and works to match a borrower with the lender that will offer them the best deal for their unique situation.
A Mortgage Lender’s Responsibilities
With any financial transaction, there are certain responsibilities, and a mortgage loan is a sizeable financial transaction. If you want to understand the role of mortgage lenders, you need to learn about their responsibilities. According to Chron, lenders are charged with several duties, including the following:
- Setting qualifications standards. Although the federal government does regulate certain parts of the lending process, mortgage lenders are largely responsible for setting the qualification standards that loan applicants must meet in order to secure a mortgage.
- Providing a Loan Estimate. The Loan Estimate conveys important loan information to consumers, enhancing the clarity and transparency of the transaction. It includes many important details, including the estimated interest rate, the monthly payment, the total closing costs, and estimated costs of taxes and insurance. The lender must provide this three-page form within three days of receiving the borrower’s application, and all lenders must use the same form to ensure consistency.
- Explaining declined mortgages. When a mortgage application is declined, the lender is not required to send a good faith estimate, but they do have to send a written explanation for their decision to reject the application.
- Vetting potential borrowers. Lenders don’t just set standards for granting home loans. They also evaluate whether or not an applicant truly meets those standards. Mortgage lenders are expected to confirm that a potential borrower has properly completed all required loan documents. They must also determine an applicant’s creditworthiness and ability to repay the requested loan by verifying their credit history, employment status, salary, and other financial information.
The Ability to Repay Rule
The role of mortgage lenders extends beyond handing out money. They also help to protect consumers. As Nolo reports, mortgage lenders act as financial gatekeepers by adhering to the ability to repay rule, which helps prevent consumers from borrowing more than they could reasonably expect to repay. Although there are certain exceptions, the ATR rule involves eight factors that lenders must weigh to reach a reasonable, good-faith determination regarding a borrower’s ability to repay a home loan. These include the following:
- The borrower’s credit history, which the lender must verify
- The borrower’s income and employment status, which the lender must verify
- The borrower’s monthly debt-to-income, which the lender must verify
- The borrower’s other financial obligations, including alimony or child support
- Continuing expenses related to the property or the mortgage loan (These might include items like property taxes, ground rent, insurance costs, or homeowners’ association dues.)
- The home loan payment amount
- The borrower’s current or reasonably expected future income and assets (This excludes the property securing the mortgage.)
- Any payments on concurrent loans that are secured by the same property, including a second mortgage
Buying a house is a major financial endeavor, so while doing your homework is smart, it is always wise to enlist the aid of knowledgeable professionals with a reputation for providing quality services. Do you still have questions about the role of mortgage lenders? If you live in the Kansas City area, contact PrimeLending today. Our committed team will help you navigate the home hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. We’re more than happy to navigate you through the process of buying your first home. When you’re ready to learn more, please give us a call at 844-701-5626.