What is a Direct Lender and Why is it Important
The mortgage industry continuously evolves as lending guidelines change, new programs are offered and federal regulations are implemented. Yet even with these changes mortgage lenders mostly offer the same basic suite of mortgage loans including government-backed mortgages such as those underwritten to VA, FHA and USDA guidelines as well as conventional loans using Fannie Mae and Freddie Mac standards.
Mortgage lenders approve loans using these universal guidelines and in doing so have the ability to sell their loans in the secondary market. Approving a loan and then selling it replenishes a lender’s credit line allowing the lender to make still more loans. The mortgage industry is indeed rather liquid as long as lenders approve loans using established guidelines. There can also be additional approval requirements established by individual lenders called “overlays.” An overlay is a lender’s internal rule that all loan applications must adhere to. For example, a lender can require a minimum credit score of 620 rather than 600.
When a lender accepts a loan application the file is first documented both as it relates to the individual borrower as well as the property. The borrower will provide third party documentation regarding income, employment and sufficient funds to close using bank and investment statements. Pay check stubs, W2 forms and copies of tax returns are reviewed. The property must also be independently appraised to arrive at a final value. With a purchase transaction, the appraised value must be at least the agreed upon sales price of the home.
Yet with these guideline’s it’s important to note they’re guidelines and not always a requirement. Lenders have the ability to interpret a guideline to make sure it follows the proper guidelines. This is why a direct lender is critical when a loan application is provided.
A direct lender will not only document the file but deliver the completed loan application to their underwriter who will review the loan file and determine the loan meets all underwriting guidelines. There is no need to send the file to yet another lender who will make that determination. Third party originators can solicit loan applications from referral sources and then forward the loan to a direct lender. This hand-off means there is a loss of control and communication is hampered.
When the lender has a question about a particular loan application and needs more information, the lender contacts the loan officer who originated the loan who then contacts the borrowers. Once the question is answered, the loan officer then contacts the lender with the answer or provides the additional documentation that was needed. You can see the communication gap with this process.
Further, a direct lender has the authority to approve a loan that pushes a particular guideline to its limits. For example, a borrower has a debt to income ratio of 46, when the loan guidelines suggest 41. A lender can still approve the loan with higher debt ratios by reviewing other facets of the loan file that support the loan exception. Such exceptions are referred to as “compensating factors.” To justify approving a loan with higher debt ratios, the lender could point to an extended employment history or credit scores well above what is required. A direct lender can make these important judgement calls with no need to consult with others.