When applying for a mortgage, understanding the various lenders and what they require from you can be overwhelming. Fortunately, it’s not impossible to narrow down your choices and choose the most suitable lender if you know what qualities to look out for.
Let’s begin by outlining the four types of lenders: direct lenders, hard money lenders, portfolio lenders and wholesale lenders. Each has their own set of requirements that may appeal to different borrowers.
Direct Lenders
A direct lender is a financial institution that specializes in mortgages and uses its own funds to make loans. Examples include mortgage banks and specialty mortgage companies. These lenders typically handle all loan processing and underwriting internally.
They may offer a range of home loan products, such as fixed and adjustable rate mortgages. Furthermore, they often provide prepayment and equity lines of credit.
These loans are generally secured by real estate and come with higher interest rates and shorter repayment periods than traditional mortgages, making them a last resort for many people.
Property flippers often enlist the services of these lenders to purchase a home and quickly fix it up before selling it. Furthermore, they lend on multifamily properties with lower down payments than traditional lenders require.
Hard Money Lenders
These private lenders make loans secured by real estate, usually offering higher interest rates than traditional mortgages. As a result, hard money lenders tend to be popular among property flippers who need to buy and resell a home quickly as well as individuals with large cash reserves.
To qualify for these loans, you’ll need to demonstrate that you possess the capacity to repay your debts on schedule. This can be done through proof of income, savings and other monthly expenses.
Your debt-to-income ratio is another important factor lenders take into account when making their decision. This number takes into account your income and all debts you owe, including your monthly mortgage payment. Generally speaking, lenders prefer seeing a debt-to-income ratio below 36 percent as an indication of financial stability and capacity to repay the mortgage.
Lenders will then inspect your credit report to see if you’ve recently applied for new debt or credit cards, and they review your payment history to make sure all bills have been paid on time.
They’ll request bank statements covering two months to verify your accounts’ activity. Furthermore, they need to confirm the source of any large deposits made into your account.
Lenders will likely request pay stubs from the last 30 days to assess your income. They’ll also review tax returns from two to three years ago to confirm that you’ve claimed all applicable deductions and credits.
