When you are ready to buy a home, you have a variety of lender options. You can go the traditional route and choose a bank. You can also try something different and use a non-bank mortgage lender. The end result from both entities will be the same – you get a mortgage. How you get there, though, may differ.
Learn the pros and cons of using a non-bank mortgage lender below.
What is a Non-Bank?
First, let’s look at what a non-bank lending institution looks like. Basically, they are lenders that don’t offer banking services. They don’t have other services, such as checking, savings, or CDs. Their focus is on the mortgage industry. They have to comply with the same requirements that banks face. They must also follow the Dodd-Frank laws.
Anyone that works at a non-bank is licensed in the state that they originate loans. In other words, they are the experts in the mortgage industry. They don’t have several other services they must learn and navigate. Their focus is on mortgages and only mortgages.
The Benefits of a Non-Bank
As we already mentioned above, non-banks tend to have more expertise in the mortgage industry. They deal with mortgages day in and day out. They are the most up-to-date on the regulations and they know the ways to get certain borrowers approved, all while following the latest mortgage regulations.
Non-bank lenders also tend to cater to niche markets. Maybe you are self-employed but your tax returns show a loss. You make money, but with the tax write-offs, you were able to decrease your tax liability. A bank will turn you away because they’ll use your tax returns for qualifying. A non-bank lender may be able to use your bank statements rather than your tax returns, giving you a better chance at approval.
Aside from being a niche lender, non-bank lenders often cater to the ‘risky’ borrower. These borrowers are often only risky in the eyes of a bank because they don’t meet the ‘standard guidelines.’ If these borrowers can demonstrate consistent income, a low debt ratio, and decent credit, though, they may be a better risk than banks make them out to be.
In some cases, you may even get more personalized attention from a non-bank lender. Because they focus on mortgage applicants alone, they can give you the personalized attention you need for the time being. Once your loan is funded, they move on to the next borrower. They don’t have to split their time amongst other banking services, making it hard to deliver that personal service you so desire.
The Downsides of the Non-Bank Lender
Of course, with every positive, there is a negative to back it up. Below are the most common disadvantages seen with a non-bank lender.
Typically, non-bank lenders have slightly higher interest rates. Because they offer a niche product, they take a higher risk, which means higher interest rates. Lenders charge the higher interest rates to offset the risk of default.
Some non-bank lenders have fewer options for borrowers. For example, if they cater to the self-employed borrower, but you are not self-employed, you may not fit into their programs. You may have to shop around longer to find a lender that suits your needs.
Non-bank lenders that don’t hold their own loans may have more restrictions. The investors will have the final say in which loans they will fund and which they won’t fund. The restrictions aren’t as well-known as bank loans, such as conforming or government-backed loans, so it can be a shot in the dark trying to figure out which non-bank lender will work for you.
We recommend that you shop around with banks and non-bank lenders. This way you know what you will get from both sides. You can then compare the interest rates, closing fees, and other costs to determine which loan is right for you. Remember, it’s not always the loan with the lowest interest rate that matters – it’s the loan that will cost the least over the life of the loan.