Any house buyer who needs a mortgage to make the purchase will be in search or a mortgage company or agent. Many mortgage companies, in reality, may be mortgage brokers, bankers or lenders and hence it is vital for any buyer to understand how their mortgage works and their company functions.
Any economy is divided into two broad categorizes, namely, money market and capital market. Money market directly trades money such as loans, currency, some specified bonds and securities and certain money secured derivatives. The capital market on the other deals directly with the capital of business and companies, with stock markets, mutual funds and other such investment avenues being its key constituents.
Make a note that the money market is the larger of these two and a mortgage loan which is a security backed loan, is borrowed from this market. The working process of the mortgage loan and its step-by-step mechanism is complex, owning to the fact that this loan has an enormous principle (actually borrowed amount), which leads us to cautionary policies of the mortgage companies/lenders.
How a Mortgage Loan Usually Works
Now in order to understand, how do mortgage companies work, it is necessary to understand how a mortgage loan works. As laymen we get to see only the part of the process which consists of application, approval, installments and interest. However the actual process in itself is long, huge and every step is as important as other.
- A mortgage loan originates with the originator. The money for the mortgage is pooled in through various sources, lines of credits, deposits and also in the form of investments.
- The originator then, on his own, lets out the loan or either sells the pool (also known as the secondary market of the money market) to other mortgage companies or hires a broker to let out the loan.
- The lender of the mortgage then (upon the receiving an application from the borrower), underwrites the loan, that is the lender goes through the income status of the applicant, the property he or she wishes to buy and also the credit rating of the borrower. If everything falls in place and the calculated interest rate is accepted by the applicant, then the loan is forwarded to the applicant (who becomes the borrower).
- The borrower then pays off the repayment installments to the company over a certain time period, including the interest.
- The lender then retains a part of the agreement, and forwards the remaining to the originator. Note that this part is not applicable in several cases of mortgage.
- The mortgage loan is chiefly a secured loan and in case of default of the loan, the lender can originate a foreclosure of the property to recover losses.
Now the mechanism may differ slightly owning to the type and terms and conditions of the loan. Apart from that, difference may be found due to the type and policies of the market lenders and even regional and local laws. The process of the mortgage remains the same as mentioned above.
Working of Mortgage Companies
A mortgage company can be defined as a financial institution which is engaged in the lending of mortgage loans and recovering installments and interest from the borrowers, as against the security of the property.
Age-old convention is the best solution and hence, conventional banks are the best mortgage companies. The banks usually originate loans from the deposits that they accept from the common public. Alternatively, they may also form a large pool of several mortgage loans and forward it to other mortgage companies, or Freddie Mac or Fannie Mae or other recognized lenders.
If you have a good credit rating and income then applying to traditional banks is the best way to get a mortgage loan, as it is the safest of all loans. There are several advantages of such loans such as security, compliance of Federal Housing Administration guidelines, fair treatment and best of all, least closing costs, commissions and other fees. The interest rate is average but affordable.
2. Mortgage Brokers
Mortgage brokers are basically middlemen and agents between borrowers and loan originators, and upon approval of a said loan they act as lenders and also do the job of recovering the loan installments. Upon complete recovery such brokers remits the amount to the originator and retains a part of the proceeds.
3. Direct Mortgage Lenders
The financial institutes which do not take the aid of any middlemen to let mortgage loans are known as direct mortgage lenders. These lenders, in some cases, may take in direct purchases from other originators, however they never act as brokers nor do they take the aid of brokers.
4. Mortgage Bankers
Mortgage bankers are the originators of loans and their chief objective is to sell of loans to other lenders which may include banks, brokers and direct lenders. Depending upon their various features, there are several types of mortgage lenders which includes, wholesale mortgage lenders, warehouse lenders, correspondent mortgage lenders, etc. There is a slight variation in functioning, however, the basic mechanism is the same.
Another classification is that of private and public lenders where the difference lies in the recognition of the lenders and a financial institute. If you are looking for a mortgage loan, then you need to put your emphasis on mortgage companies such as banks and the direct lending institutes, as they offer the best possible loans. The remaining ones should have a second preference.