Alternative Mortgage Lenders: The Home-Buying Revolution

It wasn’t long ago that people who wanted to buy a house just needed to show up at a bank and ask for a mortgage. If you had a pulse, the chances were you could get a home loan. However, that is not always the case now. Many borrowers are denied because of strict requirements.

Without a squeaky clean credit record and traditional style of income, it has become very difficult to get approval from a bank.

Why is that? The 2008 housing market crash brought about new regulations which heavily restrict who qualifies for loans (as per the Dodd Frank Act and Consumer Protection Act). Further, they also increase the cost of originating loans.

Non-banks are not subject to the same extent of restrictions, which has resulted in the emergence of alternative mortgage lenders. These companies are filling the gap in the market, allowing more people to get approved for home loans.

In this article, we’ll look more closely at why bank-initiated mortgages have declined, what alternative mortgage lenders are, the pros and cons, and where you can find the right one for you.

Let’s dive into the reasons why bank-initiated mortgages have declined over the past decade.

“Dodd Frank and related regulations have new rules that require 100% compliance. Complaints or accusations of noncompliance can spur a Consumer Financial Protect Bureau (CFPB) investigation that could result in significant fines or litigation,” says Chris Aldridge, a representative from DRI Fund.

He adds, “In response, banks have tightened lending standards to clearly fit automated lending programs. They ensure applicants check the boxes for underwriting, documentation, and evidence of ability to pay (including w-2 income and terms of employment.)

On another note, Aldridge says, “The evolving structure of our economy has resulted in more families with 1099-income, frequent job changes, and the use of non-traditional sources of credit. Consequentially, each year, more and more of the population moves away from meeting the traditional lending standards.”

This is where alternative mortgage lenders come in.

Alternative mortgage lending sources are non-bank lenders that originate loans for home buyers. The companies do not take deposits and funds are not FDIC-insured. Often, they are licensed mortgage bankers that act as direct lenders.

Many alternative lending brokers have also emerged. These are middlemen that connect borrowers with lenders. They collect information from the borrower and then search a range of lenders to find the best match for that particular borrower’s situation.

“Most mortgage companies now are broker/bankers, meaning they can do both (because there are advantages to both),” says Casey Fleming, Author of The Loan Guide: How to Get the Best Possible Mortgage.

Fleming says, “Alternative lenders have very low operating costs and are much more nimble. They are able to respond to market changes by expanding or contracting quickly so they can work on a lower margin.”
He adds, “Further, mortgage brokers have access to many lenders. They can find the lender that is the best fit for a borrower’s circumstances and one that is hungry for business in any particular week. Consequently, they can almost always get the consumer a much better deal. That is why they’re making such a strong comeback.”

Now let’s look at the different types of mortgage alternatives lending available.

There are two types of loans being offered by alternative lenders: conforming and non-conforming.

The first segment of lenders will offer better rates and require better credit, while the second helps those who may not have the best credit or income, but at a higher cost.

Aldridge explains, “The first segment are those that serve the prime conforming market and compete with banks. Quicken Mortgage and PHH are the two largest lenders here. They rely on technology to speed up the lending process and generate huge profits through smaller margins and huge scale.”

He adds, “Quicken also has launched a platform that provides a mortgage department for banks that want to provide their clients with mortgages, but don’t want to deal with the regulatory process.”

However, not everyone will get approved, as these lenders still conform to standards that have more strict requirements. If you are denied, you may get approved for unconventional mortgage loans with bad credit.

Here’s a closer look at how that works.

“The second segment serves borrowers that do not fit the standard metric. The compliance and documentation processes are more costly, but most lenders believe they’ve identified alternative metrics that demonstrate their client’s ability and willingness to pay,” says Aldridge.

He adds, “These lenders offset the costs through a combination of higher fees and higher rates. Loans typically wind up in securities sold to long-term investors or are sold to institutional investors as whole loans on a pooled basis. Within this segment, there are pure profit-driven lenders such as Carrington Mortgage and AngelOak.”

Who are the nonbank mortgage lenders and how can you find them? The top alternative lenders included Quicken Loans, Freedom Mortgage, Caliber Home Loans, LoanDepot, and SoFi.

See the full list of 100+ lenders by clicking here.

Here’s a look at the pros and cons of alternative mortgage programs.

In summary, there are now alternative ways of buying a house rather than walking into the bank and requesting a home loan. While traditional lending has decreased, alternative lenders cropped up to fill the gap.

In some cases, you may be able to complete just about the whole process right from your couch. Now, the challenge is finding the best deal amongst all of the available options.

Yael Ishakis, Vice President of FM Home Loans, says, “My advice is for a borrower to go to a lender or broker that is familiar with the myriad of different lenders.

Start your search now by browsing our Mortgage Lender Review Page.

If you’re a member of the military or a veteran looking for a mortgage, consider lenders that specialize in VA loans, such as Veterans United Home Loans.