Why is it that a home loan applicant is politely shown the door by a branch of a national bank yet is approved for the same amount of money by another lender? The answer is that lending institutions are not all created in the same image. In terms of customer base, funding sources, home values and business models, these varying financial organizations often diverge one from another. It benefits home loan shoppers to bone up on the differences among lenders. This can save prospective borrowers time and money in that they can focus on optimal lenders.
Most home loan issuers are retail lenders in that they do business with individual consumers as opposed to commercial businesses. Banks and credit unions are retail lenders although they may often extend commercial credit as well. Their funds are drawn from checking and savings account holders' deposits. Mortgage bankers also deal at the consumer level though they offer a narrower range of services than do banks, for example. If you are seeing the bank or finance company advertise to the general public, you can rest assured that this particular business is indeed a retail lender.
While consumers may trace the source of their loan to a wholesale lender, they do not interface with it in any way. The wholesale lender works through intermediaries to extend credit against collateral property. Usually, the middle-man is a broker but it is sometimes another financial institution. Brokers make their money through fees paid at the time of application and at closing. Once the loan is closed, the broker has earned its last dime. Per the Association of Independent Mortgage Experts, there are years when brokered transactions account for over half of all home loans. California's Loan Factory, Inc. and New York's Quintessential Group are large brokerages that work with a wide range of wholesale lenders.
Doing business on a retail or wholesale basis -- or both -- a correspondent lender is a first lender, but not for long. This means that upon approval and closing, this finance company will advance the funds to the borrower for purchase or refinance. Subsequent to funding, the correspondent then packages the loan and sells it to another bank. These sponsor, or investor, institutions may re-sell the loan to government chartered corporations like Fannie Mae and Freddie Mac. In any event, the sponsor then pays the correspondent a yield-spread premium for the loan. Underwriting by the correspondent must conform to guidelines set forth by the sponsor, e.g. Flagstar Bank or AmeriHome.
In contrast to correspondent lenders, portfolio lenders do not sell their loans but make their profits through fees and interest collection. Often, they retain the servicing of the loans as well. The upside of this is that the borrowers are working with the same bank over the entire term of the home loan. Because they use their own money from their depositor base, portfolio lenders have the freedom to establish and adjust underwriting standards, like home values, when they see fit.
Whereas portfolio lenders and large banks use their own money to lend, smaller financial institutions sometimes require a lender of their own. Warehouse lenders provide short-term funding through which, say, correspondent lenders can make loans. Once the correspondent sells the loan, recouping the principal and yield-spread, it pays the warehouse bank back.
Hard Money Lenders
These are individuals or partnerships that advance funds for short terms and high rates to real estate investors that flip properties for a quick profit.