Everything You Need to Know About Alternative Mortgage Lenders

It can pay to look beyond the bank and consider the benefits of alternative lenders.

With advances in technology, online lenders are an increasingly popular means of securing a loan directly from the lender. (Getty Images)

The 21st century is an incredible time to be a homebuyer. In decades past, your mortgage options were likely limited to whatever your local bank was willing to offer you. But today’s marketplace offers a refreshing array of options.

With the rise of alternative lenders, homebuyers are able – now more than ever – to connect with lenders across the nation, explore a multitude of loan structures and even choose their preferred means of moving through the application process.

Whether you’re ready to start shopping for your first home or you’re looking to refinance the family homestead, alternative lenders deserve a serious look as you start the loan-shopping process.

What is an Alternative Lender?

Simply put, an alternative mortgage lender is a nonbank entity that offers or connects you with home loans.

The 21st century is an incredible time to be a homebuyer. In decades past, your mortgage options were likely limited to whatever your local bank was willing to offer you. But today’s marketplace offers a refreshing array of options.

With the rise of alternative lenders, homebuyers are able – now more than ever – to connect with lenders across the nation, explore a multitude of loan structures and even choose their preferred means of moving through the application process.

Whether you’re ready to start shopping for your first home or you’re looking to refinance the family homestead, alternative lenders deserve a serious look as you start the loan-shopping process.

What is an Alternative Lender?

Simply put, an alternative mortgage lender is a nonbank entity that offers or connects you with home loans.

Additionally, you may find that your bank-originated mortgage options are limited if you’re a less-than-ideal applicant due to a low credit score or spotty employment history. In those cases, you might discover that alternative lenders offer you loan options that you simply can’t find anywhere else.

What Types of Alternative Lenders are There?

When you start looking for a mortgage, you’ll run into two main categories of lenders. The first is a direct lender, which is the business that actually offers the home loan products. You’ll find that banks, credit unions and some online-only lenders fall into this category.

The second group is a middleman of sorts, who are matchmaking professionals or companies whose aim is to connect homebuyers with lenders. Brokers and lending marketplaces typically fall into this category.

Here’s a look at how both types operate and how working with them might impact your homebuying process.

Credit unions: Credit unions operate under an entirely different business model from banks. “We are a not-for-profit financial services organization,” says Debbie Ames Naylor, president of mortgage banking and corporate executive vice president at Pentagon Federal Credit Union. “We are actually owned by our customers, and we like to call them ‘members.’”

A credit union is a direct lender, meaning that the credit union itself is the loan originator and not the middleman. A credit union can offer the same popular mortgage structures that banks do, and according to the National Credit Union Administration’s consumer resource site MyCreditUnion.gov, credit unions generally offer fewer fees and better interest rates on loans. Plus, a credit union can give you options for how you want to go through your mortgage process that you may not have with other alternative lenders.

First-time homebuyers may feel more comfortable going to a credit union’s branch or speaking on the phone with a representative. Meanwhile, veteran homebuyers might appreciate the ease of using the online application tools.

Keep in mind that each credit union has its own requirements for membership and its own suite of financial products. So do your research before joining a credit union in order to get a mortgage.

Online lenders: With advances in technology, online lenders are an increasingly popular means of securing a loan directly from the lender. Quicken Loans, with its Rocket Mortgage product, is one of the largest and best-known online lenders. Rocket Mortgage features customizable loans, mortgage approval in minutes and technology that limits the hassle of paperwork. Other big companies in this space include Lenda and PennyMac.

Benefits offered by online lenders typically include the ability to get a mortgage without leaving your couch, the ability to provide documentation electronically, fast application and approval processes, access to high-quality loans and sometimes low fees.

On the flip side, some online lenders make it tough to reach a real person if you need help. You’re on your own in filling out those online applications, so there’s a greater likelihood that you’ll make a mistake without a professional walking you through the process or handling it for you.

Lending marketplaces: Lending marketplaces exist as matchmaking services that pair borrowers with the right lenders for their needs. The marketplace doesn’t itself offer loans. So, once borrowers have chosen a loan, they work directly with the lender to complete the lending process.

LendingTree, loanDepot and SoFi are some of the best-known marketplaces for securing many types of loans, including home mortgages. To get started, you provide some basic information about yourself, your finances and what you’re looking for in a loan. Then, you’re offered a variety of loan options from regional and national lenders, allowing you to compare. According to a Consumer Financial Protection Bureau report from 2015, only about half of borrowers shopped around for their mortgage.

Brokers: Like lending marketplaces, loan brokers are another type of middleman in the lending process. A broker works with you one-on-one and acts as a liaison between you and the lender. You can find some brokers maintaining brick-and-mortar offices, while others operate primarily online.

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