What You Need to Know About Mortgage Lenders
The Basic Definition of a Mortgage, Subprime Mortgage, or FHA Loan
Sep 30, 2009
Though tighter regulations following the subprime loan meltdown of 2008 put many mortgage loan makers out of business for good, many others remain, and still present a confusing choice for would-be borrowers. A little background on the home loan business may better equip consumers with this challenging part of the home-buying process.
What is a Mortgage?
Technically speaking, nearly all mortgage loans are an agreement to facilitate the purchase of real estate by allowing a home buyer to pay loan installments to the lender. The lender will supply the payment to the seller in full, and over time will recollect the principal as well as additional interest payments form the borrower. The interest portion of the monthly payment is how mortgage lenders generate profits.
In almost all cases, the real estate itself is the loan collateral, which would be considered a ‘secured’ loan. In the unusual case where no collateral is required, the loan is said to be ‘unsecured.’
Who Are Mortgage Lenders?
Consumers can borrow money for a real estate loan from the obvious entities, such as banks (like U.S. Bank), or through a dedicated mortgage lender (such as Lending Tree). However, those institutions may or may not actually use their own cash to purchase the property upfront and then gradually resell it to the borrower through monthly loan payments. In many cases, lenders are simply face agents for a ‘behind the scenes lender’; both parties generate income in the process, though.
Mortgage brokers are often a better choice for borrowers, as they may have access to several lenders where a bank or loan company may only use one lender, or only make loans using their own cash reserves. A larger number of potential lenders to choose from means a broker has a better chance at finding better loan terms.
Many stock brokerage firms also offer mortgage loans, though in many cases those too are simply passed along to a nameless or faceless lender, generating income for both the broker as well as the lender.
What is a Subprime Mortgage Lender?
For all intents and purposes, a subprime lender is the same as a conventional mortgage lender, except that a subprime lender specializes in dealing with borrowers who may have less than perfect credit.
Generally speaking, they may require more documentation, will charge higher interest rates, and will not likely offer the same size of loan that they would to someone with a higher credit score, but comparable income and a comparable down payment. Nevertheless, even a subprime loan can be better than no loan at all.
What is an FHA Loan?
FHA stands for Federal Housing Administration – a government agency designed to regulate the mortgage market by (1) insuring the loan to benefit the lender, and (2) regulate interest rates and loan terms to benefit the borrower. The FHA’s involvement facilitates loans that may not have transpired otherwise, and is therefore considered to provide a vital service to U.S. citizens who want to own homes but may not qualify for a loan with most lenders. However, the FHA rarely insures a loan that would be considered subprime.
That said, the FHA is not a lender in itself, and not all loans utilize the FHA’s insurance protection to lenders. Most large home loans will not qualify for FHA terms.
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