The Differences Between Lenders and How They Affect Mortgage Rates

A first-time home-buyer can be confused by the loan process. With many types of loans and lenders who make commissions in differing ways, it can be daunting choosing the right provider for a home loan. Proper knowledge about mortgage rates is essential when researching where to go for a loan.

When an individual takes out a mortgage they use the house as collateral and the bank or lender provides the money (usually 80%). There a numerous different kinds of loans, many that should be avoided, and there are many kinds of lenders, who make commissions in many kinds of ways. Knowing how these lenders provide loans and make their money is an important thing to understand when shopping for a home loan.

Banks - By making a profit off a markup of the rates of loans sold to real estate investors, banks are the ultimate retail lender. Most banks will not negotiate over rates and fees with the average borrower. They simply do not have too. By making their money off of investors, the average consumer gets the standard treatment that is laid down in a procedures manual by the bank. The loan officer representing the bank either doesn't have the will or the authority to make any change to the rate other than raising it. Banks are not even required by law to disclose how they make their profits off of loans.

Mortgage Brokers - These providers offer many different wholesale loans to their clients. They do not provide the funds to back the loans. A mortgage broker is considered a retail lender because they make profits off of the markup of the national average mortgage rate that they sell to the borrower. The industry term for this is Yield Spread Premium. A YSP can easily be avoided if the borrower simply explains to any potential broker that they understand how YSP works and will not do business with a broker that practices that policy.

Many brokers have earned bad reputations by taking advantage of the YSP through unethical profit margins. By dealing with a UMB, or Upfront Mortgage Broker, a borrower can avoid any YSP traps. A UMB will specify a set fee for their services and that is all the borrower will pay.

Retail Lenders - There are many names for this type of lender including portfolio lenders, mortgage bankers and direct lenders. However, they all offer the same services and make commissions on markups of rates and extra processing fees. Many of the large companies have either individual lenders or entire divisions that sell loans and make money by marking up the average rate. Retail lenders do all the processing and underwriting and usually provide the funds to back-up the loan. The high overhead costs of operating this way, however, can lead to an increase in the mortgage rates of the loans sold.

Loan Officers - This type is simply a representative for a large lender or broker. Their employer usually has them track down potential borrowers. If the lead turns into a client for the broker or lender then the loan officer receives a commission on the sale.

With the proper research and information on mortgage loans, anyone can find a provider offering a low wholesale rate. By finding the right lender and knowing how they make their commissions, a potential borrower is prepared to negotiate reasonable mortgage rates. After tracking down the right lender, ask them for advice on the type of loan that best suits the situation.

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