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A lender in real estate is a company that lends you money to purchase property. This lender might be a bank, broker, or another organization. They’ll evaluate your ability to pay back the loan before approving it and help you refinance later on if appropriate. Lenders are necessary for most buyers seeking property who don’t have enough cash to purchase upfront. A few different types of lenders exist, offering products from traditional mortgages to short-term hard money loans, and which one you choose depends on what exactly you need and what your situation is.
In this guide, we’ll cover what a lender in real estate is, the different types of lenders, and more, so you can better understand your options when it comes to getting financing for a property.
What Is a Lender in Real Estate?
What does a lender do in real estate? Exactly what the name implies. The lender lends money for transactions involving property purchases or modifications. These loans may be short- or long-term, and the entire lending process may be done through private companies, or they may involve the government at some point, such as with the Federal Housing Administration’s guarantees of some home loans. Additionally, it’s important to note that there may be a fee for working with the lender, which is something to consider when looking for financing.
What Is a Mortgage Lender?
A mortgage lender is a lender that specializes in issuing loans for mortgages. In other words, it’s another term for a lender in real estate. Not only will a mortgage lender loan you the money you need to purchase a home or property, but they’re also responsible for managing your loan on a daily basis by responding to inquiries, tracking the interest and principal paid, and more.
What Are the Different Types of Lenders in Real Estate?
You have a number of options when seeking a lender. The one you choose depends on what qualifications you have, how quickly you need the loan, what benefits you get by using that lender, and whether you want to deal with an intermediary or a company that issues its own loans. You can also choose to work with a broker, who is not a lender, but someone who helps you find a lender. Explore some of the different types of lenders in real estate below.
Banks are one of the most common sources of mortgage loans for many people, and going to one’s bank to inquire about getting a mortgage loan is often what people assume they have to do if they want to buy property. Most mortgage lenders do work through banks, and while some banks fund their own mortgage loans, most work as a middleman, approving the loan but getting the actual funds from a wholesale lender. That wholesale lender does not work with the public, so you would not be able to get a loan directly from them. Banks may offer special deals for their customers, but anyone applying for a mortgage at a bank, even their own, can expect higher interest rates and a long wait for approval compared to other lenders.
2. Mortgage Brokers
Brokers are not lenders. Instead, these are people who help you find a lender and who help process the loan. The broker searches for the best lender for you by examining factors like rates, repayment terms, and so on, from a pool of potential lenders. Some of these potential lenders are ones who work only with brokers, too. When you go to a mortgage broker, you can find your options for loans have expanded greatly. Brokers do typically charge a commission fee – only about 1 percent – and they take care of the searching and most of the paperwork. You’ll still need to prove that you’re able to pay back the loan, but brokers will handle the communication with the lenders.
3. Hard Money Lenders
What is a hard money lender in real estate? Hard money lenders offer short-term loans that go through fast processing, which is perfect for people who need the money quickly. In most people’s minds, a mortgage is something that lasts 15 to 30 years, but hard money loans usually need to be paid back in just a few years. The trade-off is that getting the loans can be a lot easier and faster, which is perfect if you’re trying to buy a cheaper property that could be snapped up by another buyer who has the money in hand. These loans are great for those interested in flipping homes that they’ve purchased to fix up. If you apply for a hard money loan, you’ll likely have higher interest and origination fees because the source of the loan can be from private individuals rather than a wholesale lender, but the reward is knowing you can gain access to the money sooner.
4. Credit Unions
Credit unions are like banks in that customers approach them for a mortgage, and the credit union loan officer approves or denies the application. The loan might come from the credit union itself (see the section on direct and retail lenders) or from a wholesale lender, just as it would with regular banks. However, credit unions are non-profit entities, so interest rates could be lower than they would be on a similar mortgage loan from a bank. Another issue is that you likely won’t be able to apply if you’re not a member of the credit union.
5. Retail Lenders
Retail lenders can be a bank or credit union that lends money directly to an individual and not another financial institution. In other words, they’re companies that underwrite their own loans, rather than getting the funds from a wholesale lender, who in effect lends money to whatever bank or credit union has requested it. So, your bank could be a lender that gets funds for loans from another organization (wholesale) or one that issues loans using its own money (retail).
6. Direct Lenders
Direct lenders are similar to retail lenders, but they focus on mortgages. A retail lender will have different financial products that its customers can use, while a direct lender will offer only mortgage loans. These direct lenders may have more flexible qualification requirements than retail lenders. However, be aware that direct lenders have only their own products or loans. In other words, if you don’t like their interest rates, you have to speak with another direct lender to find out what that lender’s products are like. And, if you want to get a sense of what the typical interest rates and terms are for these loans, you have to contact each direct lender you’re interested in. You won’t have a middleman in the form of a broker doing this for you.
How Do You Choose the Right Mortgage Lender?
With all these options, you may wonder where to start and how to find the lender that’s best for you. It depends on a number of factors, including:
- Interest rate: Different lenders offer different rates. Banks and hard money lenders usually have higher interest rates than other institutions and lenders.
- APR: In addition to the interest rate, you’ll have other fees like origination fees tacked on. The APR is your annual cost of the mortgage as you pay all the interest, fees, insurance, and so on.
- How fast you need the loan: Do you need the loan as fast as possible, or do you have time and aren’t at risk of losing out on great homes? If you need money fast – not just approval, but the money – then a hard money lender offers the fastest processing times.
- Origination, underwriting, and application fees: Purchasing property involves a lot of fees, with some lenders offering lower fees than others. Remember, all of these fees affect your APR.
- Estimated closing costs: Closing costs are a percentage of the mortgage loan that you add on when you finalize getting the loan. These can range anywhere between 3 percent to 6 percent but may be lower or higher, depending on the lender. With property prices on the rise, you’ll want a lower percentage for closing costs.
- Reputation: Always do your due diligence by reviewing a lender’s reputation through reviews and testimonials, as customer stories often paint a clearer picture of a company’s services and products.
- Customer service: It’s also important to work with a lender who has excellent customer service, as they can help you quickly and calmly investigate and fix issues, along with helping you manage the loan and ensure payments are applied to your account on time.
- Loan offerings: What products do the lenders offer? If you don’t qualify for a basic mortgage, do they have other loan programs you might qualify for?
Final Notes: What Is a Lender in Real Estate?
A lender in real estate can issue you a loan for the purchase of a property, whether it’s residential or commercial. Mortgage products are plentiful, and if you don’t qualify for one, don’t give up; you could find several others that allow you to purchase that property you want. Source Capital offers residential hard money loans for residential property purchases that help you become an owner in today’s highly competitive market. If you have more questions or would like a guide to hard money loans, contact Source Capital for help today.