Mortgage lending is the practice of giving people loans to buy a home. Many different types of financial institutions are engaged in the process of mortgage lending, including banks and credit unions.
How Does Mortgage Lending Work
When a bank decides to loan someone money for a mortgage, they have an underwriting process that the loan goes through in order to make sure that the loan is a good risk and that the borrower is likely to pay it back. Based on this process, a loan is either approved and granted or denied.
When a loan is approved, the mortgage lender has a few different options. The lender can keep it “in-house” or on their books. This means you will keep making payments to the mortgage lender that you originally borrowed the money from. They will make money in the form of the interest that they charged to you and the loan will be an investment that they carry.
The mortgage lender also has the option of selling the investment on the secondary mortgage market to investors. This means your home loan can be resold to a different mortgage company. When this occurs, you will often need to make payments to someone different than the original bank that lend you the money. Sometimes, this happens immediately after you get the loan, while in other cases, you may be notified later on that your mortgage servicer has switched.
When a bank resells a loan, they make money through the sale of that loan rather than through your interest payments. The investors who bought the loan make money from your interest payments. The actual process of who the loan is resold to and how it is resold can be complicated, as mortgage products are sometimes packaged and a bank sells a whole bunch of different mortgages at different risk levels at once.
As a consumer borrower, the only thing that is important to be aware of is that your loan might be sold and you’ll need to send your payments to someone else (all other terms of your loan do remain the same though, even if it is sold).
What about FHA Mortgages?
One common misconception that people have is that the government actually gives out mortgages through the Department of Housing and Urban Development (HUD). You may have heard of FHA or VA loans and assumed that this meant the government was a mortgage lender.
In reality, however, the FHA or VA just guarantees loans made by other lenders if those loans fall within specific guidelines and meet specific criteria. This means you will go to a regular bank or mortgage lender and you will get your FHA loan through them. The FHA will provide a guarantee to the lender that if you do not pay back the loan, the losses will be covered.
Who is Engaged in Mortgage Lending?
Any number of financial institutions are engaged in mortgage lending. Most people get their mortgage loan through banks or credit unions. However, it is also possible to get owner financing and get your mortgage right from the person who sells you the property, or to find non-conventional lenders willing to carry a mortgage loan.
There are also financial professionals called mortgage brokers that help in the mortgage lending process. These professionals have relationships with a number of different banks and shop around to find a loan that works for you. There is a charge for using a mortgage broker so it may not be worthwhile to pay this cost unless you have a unique situation that might make finding a mortgage lender difficult.