You're searching the internet for a lender you can trust to one, give you the best possible deal and two, assure you close your loan on time and at the agreed upon terms. So who do you use? Here I will describe the types of institutions from which you can get a VA loan, or any mortgage for that matter. Only two of the three types of institutions can be deemed true lenders however. This will allow you to better decide who to use when getting your next VA loan.
3 Types of Mortgage Lending Institutions
There are 3 basic types of institutions you can acquire a VA home loan from - Banks, Mortgage Companies and Brokers. Each one serves a purpose and yes, ultimately you can close on a loan through each type of institution. However, there is a cost involved with each. That cost may be the fees they charge to originate, process and close your loan for you or it could be a more indirect cost. Examples of indirect costs would be extension costs required when the loan goes past the lock extension period or worse, loss of contract on a home as a result of not meeting contract dates. The more direct contact you have with your loan through your lender improves the chances you'll save a lot of time and money.
Brokers are are not lenders but do have a purpose. They can help by shopping your rate for you amongst several different investors saving you time doing it yourself. One thing you may not know is the other two can do the same but in a different way and in most cases at less cost to you if the institution does enough business to pass savings on to their customers in lower rates and/or fees.
Mortgage companies, or Mortgage Bankers work similar to brokers. They too have several investors to shop your VA mortgage rates for you, but the difference is they are the initial lender. They have a credit line that they borrow their money from. This money can be borrowed from a bank or more than likely, a large commercial credit line at a very high interest rate (higher than what they are lending). After a customer closes on a loan, they sell that loan to an investor, that like a broker, they have predetermined. Once that loan is sold, they can pay back the credit line.
The problem for Mortgage companies comes when they make the wrong loan decision, and they will. If the investor doesn't like their underwriting decision, they will choose not to buy the loan from the mortgage company. At that point the company is stuck with that loan and has to pay it back themselves. Keep in mind, the rate in which they borrowed the money is much higher than the rate they lent on, sometimes over twice the amount they borrowed at. Now they're left with a loss they have to make up somehow.
Imagine, as the owner of a mortgage company, you've borrowed $10 Million at 9% interest and $5 Million of it you lent out at 4.5% but due to mistakes made on the loans, you can't sell that book of business off and have to pay it back yourself. How would you make up the loss? This loss is figured into their future profits which ultimately come from raising rates and getting to paid more from the investors that buy their loans or by increasing their fees...or both. Either way, future customers pay for their mistakes until they are back in the black, if that ever happens.
Banks have the luxury of holding onto their loans or similar to mortgage companies, find an investor to buy their loans. Unlike mortgage companies that have to borrow the money at sometimes ridiculous rates, banks can get money from the Federal Government at much, much lower rates. This of course allows them to either charge less or offer lower rates. In some cases, if the profit margins are higher, they can do both. VA loans have huge profit margins. So it is likely you can find a bank that can offer a better deal than either the broker or a mortgage company.
Although banks are some of the most secure institutions to get your VA loan from, they too can get themselves into a situations where they have losses to make up for. If they portfolio their loans, they too can get themselves in trouble. In an unstable economy, anything could happen and homeowners will start losing their houses. If that happens, Portfolio banks could be sitting on millions of dollars in foreclosed properties, costing them hundreds of thousands of dollars each year. Guess who will ultimately have to pay? You guessed it. If you're coming in after these losses, more than likely that bank has already raised their rates or changed their fee structure.
In addition, pay attention to whether the lender is a L.A.P.P. lender or not. L.A.P.P. stands for Lender Appraisal Processing Program. What this means in short, is the lender has been given full right by VA to issue the N.O.V. (Notice of Value) rather than VA having to do it. Most don't realize that this can cut at least a week from the processing time. So, knowing that the best rate can be attained from shorter period locks like 20 day or 30 day locks, if you are dealing with a Non-LAPP lender you will more than likely either have to pay money to extend the rate or you could lose the rate all together.
Ultimately, every veterans wants to save as much as possible but the question I always run into more than any other question is "How is it you don't have any fees but these other lenders do?" For those of you that are looking for a VA loan and find a lender that doesn't charge any fees, hopefully this article will clear that up for you. Either way, pay very close attention to the lender that originates your loan for you and do your research. You could save yourself literally thousands in closing costs and higher rates.