Historically, mortgages in the U.S. were traditionally financed by banks. Interestingly, these institutions also operate other lines of business, like offering deposit accounts, safe deposit boxes, and insurance products.
But today, mortgage lending is anything but old-fashioned, and as buyers are looking to lenders other than banks to fill the void.
Fortunately, these newer financial institutions continue to create innovative mortgages that fit the diverse needs of borrowers, rather than forcing consumers to conform to rigid standards. The end result is more people with the financing to afford the home they need, rather than being shut out of homeownership entirely.
The trend away from banks and toward nontraditional lenders is a relatively recent development that is reshaping the financial landscape in the U.S. This can be seen in a report of the top U.S. mortgage lenders by market share in 2011 compared to 2016. Get this, in 2011, 50 percent of all home financing was underwritten by the five biggest banks in the country.
Just five years later, however, six of the top 10 mortgage lenders by volume were considered “non-bank lenders” that focus on home loans almost exclusively.”
Explaining the shift in the mortgage market
Why are more homebuyers choosing non-bank lenders over traditional banks?
Much of the shift has to do with the increasingly strict standards that banks adhere to when vetting mortgage applications. Prospective homebuyers were expected to have stellar credit scores, high income and significant net worth already established before being approved for a traditional loan.
However, this is not the financial reality for millions of Americans. The new lenders can be a better alternative for families that have imperfect credit for one reason or another and just need a second chance.
Secondly, the new mortgage lenders are much more in tune with their customers and provide a far better experience. There is a much greater level of personalization, With the larger banks, on the other hand, customers can just become a number.
These new lenders have dramatically increased their market share purely on the basis of the superior service and support they provide.
Finally, the speed in which mortgage lenders can close transactions is much quicker than those of traditional banks. There are fewer layers in these organizations decision making can be made at a faster pace.
Traditional banks are not known for their efficiency, and the result for mortgage applicants is a long, drawn-out process of signing paperwork and enduring waiting periods
Many mortgage lenders can close loans in under 25 days, where that is not the case with larger institutions.
Non-Prime Lending Options
The need for non-prime products is growing, as conforming loan rules have tightened. Working with a lender that can only provide standard, conventional products will limit a legitimate and legal funding resource for many customers.
A bank statement loan or a loan on a non-warrantable condo are examples of “non-prime” products. A bank statement loan, among other things, can support the private business owner who has significant expense associated with their business and can still satisfy credit and ability to repay. These are individuals who will not qualify under the conventional guidelines of Fannie/Freddie but still have the ability to service a mortgage on time.
For investors, there are products that utilize the rent from the property to qualify for a loan. In this option, the debt coverage ratio measures the ability to pay the property’s monthly mortgage payments from the cash generated from renting the property.
Lenders use this ratio as a guide to help them understand whether the property will generate enough cash to pay the mortgage expense.
The debt coverage ratio is calculated by dividing the property’s month net operating income (NOI) by a property’s monthly debt service. The monthly debt service is the total of the mortgage principal and interest payment, taxes, insurance, and any HOA fees.
Contact The Right Lender
When you are shopping for you lender, make sure that he/she has a wide variety of products available and takes the time to understand your individual needs. That will make all of the difference – and it would be my pleasure to help!
