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Types of Lenders: From Banks to Mortgage Brokers

Your Local Bank
Mortgage Brokers
Credit Unions
Private Lenders
Hard Money Loans
What kind of lender should you choose?

Your local bank
Once upon a time… you walked into your local bank where "The Banker" greeted you by name. You sat down and told him (it was almost always him) that you needed some money and why. He looked wise and counseled you a bit on what you might do instead of spending money, or ways to spend less of it, and then wrote you a check - provided he knew you'd repay it.

My how times have changed!

Now your local banker is called something else - the bank manager, perhaps. And he or she hands you over to a loan officer instead of visiting with you.

The loan officer may know you, but will still require you to fill out several forms, because the decision will be made in a main office, miles away. You won't be an individual who is known and trusted. Instead, you'll be a credit report and statistical information. So your good standing with that particular bank won't carry much weight.

The people you know at your local branch will have nothing to say about your home loan - nor any other loan you might need.

When it comes to the home mortgage loan itself, banks can usually offer you a variety of programs, but it will be a small selection, because they restrict lending to their own programs. Thus, the choices are narrow. Mortgage brokers are different.

Mortgage Brokers

Mortgage Brokers come in two varieties: those who work for one Mortgage Banker, such as Countrywide Home Loans or Wells Fargo Mortgage, and independent Mortgage Brokers who draw from Wholesale Lenders across the country to find you the best rates.

Each Mortgage Broker must be licensed in the state where they operate. Then they must be approved by each mortgage lending institution in order to do business with them. Therefore, some brokers offer a wider variety than others. Many will choose just a handful of mortgage bankers whose programs will serve the majority of their borrowers.

Others, such as Mouse House Mortgage, work with a wide variety of mortgage bankers in order to offer the best possible selection of home loan rates and programs available.

Credit Unions

Some credit unions offer special services to members - and those services can include mortgage loans at very favorable rates. Depending upon the size of the credit union, a borrower might or might not have direct contact with the decision makers.

Membership is generally required to obtain a home mortgage loan through a credit union, but many accept new members without restriction.

Private Lenders

Private Mortgage Lenders are individuals who lend their own money with homes or land as the collateral. They may work through a Mortgage Broker, or on their own. You'll find their ads in the classifieds, on real estate forums, etc.

While each is an individual with different criteria, as a general rule of thumb, most will only lend about 50% of loan to value. Again, since they are individuals, some will go higher if they like the collateral. Many Private Mortgage Lenders will want to view the property and meet the borrower themselves before extending a home loan.

These loans almost always carry a higher interest rate than loans granted through a Mortgage company. They are generally referred to as "Hard Money Loans."

Hard money loans

With an interest rate of 10% - 11% - 12% or even more, hard money loans are not for everyone. They are, however, useful in certain circumstances.

One such circumstance is time. While a standard home loan through a bank or mortgage broker takes at least a month and sometimes much longer to process, a private hard money lender can approve the property and the borrower almost instantly - and provide money for closing in as little as a day or two.

Hard money lenders are individuals who make their own decisions - not corporations who have to follow set guidelines. And, since they do charge much higher interest and require much lower loan to value ratios, they will often lend on property that a Mortgage Lending Institution won't touch.

These loans are usually obtained for a specific purpose and planned for short term use. For instance, hard money can be used to buy a property that has been damaged and must be repaired before a conventional loan can be approved.

Hard money lenders may also grant loans to individuals who have very poor credit - but this isn't common because of the high down payment they require. For borrowers with poor credit, hard money loans are generally used to borrow against real estate they already own outright.

What kind of lender should you choose?

The answer depends entirely on your individual situation. Generally, a mortgage broker will offer you the most choices for a home loan. But, if you want a standard loan and have a bank or credit union you like, check with them as well.

Unless you have special circumstances, hard money from a private mortgage lender is probably not the best choice.