If you applied for a home loan in 2007, the odds were good that your mortgage lender would be a traditional bank, one that offered not only mortgage loans but savings and checking accounts, too. Today, though, non-banks, financial institutions that only make loans and don't offer such banking services as checking and savings, account for nearly half of the mortgages originated in the United States.
Does this matter to borrowers? It might, especially to those with lower credit scores.
That's because borrowers with credit missteps are more likely to qualify for mortgages from non-bank lenders.
Non-banks bigger players today
In late 2017, the Federal Reserve released a slew of mortgage information, something it is required to do under the Home Mortgage Disclosure Act. The data show that in 2016, the country's three biggest banks, Wells Fargo, JPMorgan Chase and Bank of America, accounted for just 15 percent of the mortgages loaned to low-income borrowers.
That’s a significant dip from 2010, when these three big banks accounted for 32 percent of all the mortgage loans originated for borrowers with lower incomes.
Also in 2016, non-banks accounted for 48 percent of all mortgage loans, according to Home Mortgage Disclosure Act numbers. That's a big jump from 2007, when non-banks accounted for just 19 percent of all U.S. mortgage loans.
TalkPoverty.org, a website run by the Center for American Progress, in a story late last year pointed out that nonbanks such as Quicken Loans or Loan Depot face fewer regulations than do traditional banks. They can also be more flexible with their lending requirements, meaning that they might offer loans to credit-challenged customers who would be turned away by traditional banks.
What does this mean? It’s both good and bad news for borrowers who might have credit blemishes.
Fees, interest might be higher
Consumers, though, need to be wary. TalkPoverty writes that because these non-banks often lend to lower-income borrowers with credit missteps, they might charge higher mortgage rates and fees as a way to protect themselves. Borrowers with lower credit scores, after all, are more likely to miss payments, making them riskier ones for lenders. It’s why these borrowers often have to apply for bad credit loans that come with higher rates and fees.
Mark Ferguson, broker and owner of Blue Steel Real Estate in Greeley, Colorado, said that the arrival of more non-banks is a good thing for consumers. It gives them more options when they are shopping for a mortgage.
Ferguson recommends that his homebuyer clients, when searching for a mortgage, concentrate not just on the big national banks and their mortgage affiliates, but scour their local community for credit unions and local banks. They can also look for big online non-bank lenders, too, as an alternative.
“A lot of consumers don’t know about the options they have for getting a mortgage today,” Ferguson said. “Even their local bank or credit union might have more flexible options for them. We have had a number of deals that we couldn’t make work with traditional banks. Our customers’ local banks, though, were able to help out and provide the financing.”
Non-banks can be more flexible
Ferguson said that traditional banks are often still the best option for borrowers. But there are times when a traditional bank might balk at originating a loan. This can happen if borrowers with low credit scores apply with them. It can happen, too, if borrowers are interested in buying a home that needs significant repair work or has serious defects that need to be corrected.
“The traditional banks, if the house has serious plumbing needs or the roof needs to be replaced, are often hesitant to offer financing,” Ferguson said. “There are other options for those properties. Local banks might take them on.”
That’s because traditional banks often sell the mortgages they originate on the secondary market. Because of this, they tend to follow stricter guidelines. Local banks and credit unions often operate as portfolio lenders. They don’t sell the loans they originate. Instead, they keep them in-house. This gives them more flexibility when it comes to originating loans, which makes them a better choice for borrowers interested in properties that need work or those with credit dings.
Andrew Weinberg, principal with Great Neck, New York-based mortgage broker Silver Fin Capital Group, said that non-banks tend to be more creative than the big, traditional banks. This means that they are more willing to work with borrowers that don't meet all the debt, credit and income requirements for which bigger banks are looking.
"Every loan has 100 ways to die," Weinberg said. "There are 100 things a lender might not like about it. That doesn't mean it's not a good loan. It's just that the lender has its guidelines. If you don't fit in that lender's guidelines, you might not quality. But that doesn't mean you can't get a loan from another lender with different guidelines."
An example? One lender might require that borrowers have at least two months' worth of mortgage payments saved up. Another lender might only care about credit scores and debt-to-income ratios. If you don't have that money saved, you might not qualify with the first lender, but might with the second.
Herndon Davis, a mortgage broker with Houston-based Mortgage Real Estate Services, says that borrowers who are struggling to qualify for conventional mortgages or mortgages insured by the federal government, such as FHA or VA loans, do have plenty of options today.
But borrowers need to be careful: Loans offered by non-banks might be easier for credit-challenged borrowers to get. But they usually come with a price.
"Buyer beware," Davis said. "These non-qualifying mortgage products typically come with higher interest rates, while others might have prepayment penalties. The upside is that these lenders are more willing to take a risk on borrowers with less-than-perfect credit or who have recently come out of foreclosure or bankruptcy."
Davis recommends that consumers work closely with a mortgage broker before applying for a mortgage from a non-bank lender. This will increase your odds of qualifying for a mortgage without paying exorbitant fees or interest rates.
Weinberg said it probably doesn't matter to many consumers whether they get their mortgage from a traditional bank or a non-bank. All that matters is that they get that loan at a fair interest rate, he said.
"From a borrower's point of view, why would it matter if you get your mortgage from Chase or from some bank you've never heard about?" Weinberg said. "In the mortgage world, they are giving you the money. You just want the best rate you can qualify for."