In mortgage lending, it’s important to know the difference between wholesale and retail mortgages. Wholesale mortgages differ from retail mortgages in the entities involved in the loan origination process. Wholesale mortgages are loans originated by intermediaries, namely mortgage brokers. Retail mortgages, on the other hand, are loans originated directly by banks, credit unions, or mortgage companies that have a retail banking presence.
Understanding the difference between the two is paramount for borrowers because it helps them make more informed decisions about their financing options.
Wholesale mortgages
Wholesale mortgages involve a broker or other intermediary who works directly with wholesale lenders who fund loans, such as banks or mortgage companies. The wholesale process offers a wider range of loan options from various lenders, providing borrowers with more choices. The broker collects the pertinent information needed from borrowers, evaluates various loan options, and presents the borrower with the best options. Once the borrower chooses a loan product and the wholesale lender funds the mortgage, the broker earns a commission.
Retail mortgages
Retail mortgages are originated directly to borrowers from lending institutions. Retail lenders use their own funds to finance the mortgages, and borrowers have a direct relationship with the lender throughout the loan process. Without the intermediary, borrowers can have a more convenient experience by being able to access their in-house loan officer and may even be able to take advantage of loan products that are specifically offered at the lending institution. Retail mortgages have more streamlined processes but offer a narrower range of loan options than wholesale mortgages.
Comparison of wholesale and retail mortgages.
The key difference between wholesale and retail mortgages are the entities involved in the loan origination process. As such, there are features of each mortgage type that may make one preferable over the other.
Advantages of each mortgage type.
There are three main benefits of a wholesale mortgage.
- Many times, wholesale lenders have less stringent requirements than retail institutions. Borrowers who have blemishes on their credit, or other financial hurdles, may find that going the wholesale route is an easier path to a mortgage.
- Borrowers who live in an area where banks or other financial institutions are sparse may have an easier time going through a broker who can search multiple lenders in multiple areas on the borrower’s behalf.
- Many wholesale lenders can offer lower rates than in-house retail lenders due to the volume that comes with variety.
Choosing a retail mortgage comes with its own advantages as well.
- The client has direct access to their lender and loan officer. With wholesale mortgages, they only have contact with the intermediary. This could be distressing, especially for first-time homebuyers who have several questions. Although the mortgage broker can answer questions or get the borrower the answers they need, sometimes, being able to speak directly to the person who is handling their application is more settling.
- Retail mortgages may also offer better loan terms than those brokered in a wholesale mortgage process. For example, a direct lender may offer discounts on the client’s closing costs while wholesalers may not be able to compete with that offer.
Disadvantages of each mortgage type.
The drawbacks of pursuing a wholesale mortgage mostly revolve around the fact that mortgage brokers have little control over certain decisions regarding the client’s loan. Since brokers find and present offers for the lenders, they are beholden to the terms of that lender. So, the client may not get the best possible deal, but the best deal that the broker has access to. It’s also important to remember that although all loans have fees, when the client uses a broker, they also incur broker fees in addition to any fees the lender will charge.
Retail mortgage lenders come with their own caveats. They often have a higher bar in terms of their lending standards. While wholesale mortgages are often ideal for those with more complicated financial profiles, these same borrowers may have a tougher time getting approved for a retail mortgage. What’s more, borrowers will only be offered what that particular lender has available, unlike the variety that a broker has access to.
Factors the client should consider before choosing.
Ultimately, the decision of whether to pursue a wholesale mortgage or a retail mortgage depends on the client’s specific needs and options. There are four key factors to consider before they make their choice:
- Loan options
- Interest rates and fees
- Service and support
- Customization and/or flexibility
Pro tip: Advise your client to formulate a list of “must-haves” for their homebuying experience. This will help them choose the route that makes the most sense for their specific needs.
Key takeaways
Wholesale and retail mortgages are options for prospective homebuyers that offer different benefits depending on their personal needs and preferences. Wholesale mortgages are originated through a broker, and can be beneficial for special credit situations, or when the borrower lives an area with limited lending options. Retail mortgages are good for those who seek a more personalized experience or are looking for the best loan terms.
While considering their options, remind your client that a mortgage is a long-term loan and legal agreement. So, they should take stock of what’s most important to them as it will ultimately affect their decision-making process.
FAQs
What is a wholesale mortgage?
A wholesale mortgage is brokered by an intermediary, namely a mortgage broker. The broker presents the borrower with a range of options based on their profile and the borrower chooses the one they believe is best for their needs.
How is a wholesale mortgage different from a retail mortgage?
Unlike wholesale mortgages, retail mortgages are loans originated directly to borrowers from lending institutions. There is no intermediary, and the borrower interacts with their assigned loan officer throughout the life of the transaction.
What are the benefits of obtaining a wholesale mortgage?
Wholesale mortgages allow borrowers to consider a larger range of loan products and competitive rates due to volume. They are also good for buyers who may have a unique credit history or financial profile.
What are the benefits of obtaining a retail mortgage?
Retail mortgages are recommended for borrowers who wish to cut down on the time that the lending process takes and are concerned about being able to access their lender with ease instead of communicating through a broker. Depending on the institution, retail mortgages can also be less expensive because there are no broker fees and banks can offer special discounts on closing costs that brokers cannot.
What factors should be considered when choosing between wholesale and retail mortgages?
Most mortgages are decades-long financial investments; so, the client will want to make sure to prioritize what they need and prefer before they decide which type of mortgage to pursue. Factors such as available loan types, interest rates and fees, customer service and support, and flexibility are key in determining which is right for the client.
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