Non-bank lenders offer loans to homebuyers who may not otherwise qualify.
In 2007, just before the Great Recession, traditional banks issued the lion's share of mortgages. By 2016, nearly half (48%) of all mortgage loans were issued by non-bank mortgage lenders like Quicken Loans, LoanDepot, PennyMac Financial, and Freedom Mortgage Company. These non-bank lenders do not offer services typically associated with banks, like checking and savings accounts. Here we'll discuss what sets non-bank lenders apart and what else you should know.
Less regulation
After the Great Recession, there was a crackdown on traditional mortgage lenders and the way they conduct business. New regulations were implemented, designed to prevent a repeat of the housing market meltdown. Non-bank lenders were spared many of the new rules, although they did not escape notice entirely. Today, federal regulators are concerned that non-bank lenders have fewer rules to follow than traditional lenders.
This has given non-bank lenders a leg up on the competition. The time and expense that goes into mortgages have proven too much for some traditional lenders. They have either gotten out of the mortgage business or minimized the number of mortgages they write. Non-bank lenders moved into that void and continue to grow their market share.
Greater flexibility
Non-bank lenders are more likely to lend money to borrowers who might be rejected by traditional banks. For example, a borrower with a low credit score or someone hoping to purchase a home that will require a lot of renovation is more likely to be approved by a non-bank lender.
Non-banks tend to issue more government-backed loans such as VA and FHA mortgages which are aimed at higher-risk borrowers.
More: Check out our picks for the best mortgage lenders
Convenience
Non-bank lenders were among the first to streamline the loan process, allowing borrowers to do nearly everything online. Other lenders have joined the online revolution, but non-bank lenders tend to be ahead of the game. For example, potential homebuyers can answer some online questions with Quicken's Rocket Mortgage and receive a speedy loan approval or rejection.
Where do non-bank lenders get the money?
Non-bank lenders can't take funds from customer deposits to make mortgage loans as they don't offer checking and savings accounts. Instead, they borrow the money on a line of credit and sell mortgages on to investors. Once they have sold your mortgage, the non-bank lender is not necessarily out of the picture. Many will continue to collect your mortgage payment each month and receive a fee from the investor to whom they sold the mortgage note.
What to look out for
Finding the right mortgage takes effort. As you consider non-bank mortgage lenders, keep your eye on these potential issues:
Higher interest rates and fees
Highly qualified buyers will find the interest rates competitive, but loans to less-qualified borrowers still come at a price. If your qualifications aren't stellar, you may find you'll be offered a higher-than-average interest rate. That's because lenders need to minimize their risks. Maximizing the fees they charge and raising the interest rate on your loan helps offset the risk of default.
If your credit score is your primary concern, be sure to include credit unions in your rate shopping. Credit unions are member-owned and operate as non-profit businesses. This means that you are both a member and owner and that the money the union earns goes back into the business. As such, they can often offer highly competitive interest rates and loan terms, even if your credit score has a few dings.
Concerns for the future
Experts are concerned about what might happen to non-bank lenders when the next financial crisis hits. Non-bank lenders were hit hard during the Great Recession and analysts fear it could happen again.
According to the Brookings Institution, the danger is that non-bank lenders depend on short-term credit to finance their loans. Markets usually tighten in times of financial crisis. If they do, short-term credit may become prohibitively expensive, and interest rates are likely to spike.
The fear is that in troubled economic times, non-bank lenders may not be able to survive. The impact would be primarily felt by minority, low-income, and credit-challenged Americans. In fact, lenders are already tightening their loan requirements in the current climate. The knock-on effect could be this: Fewer Americans will be able to purchase homes, so more sellers will be stuck with properties they can't sell. In that scenario, home values will fall because supply is greater than demand.
Still, there is no reason to believe that non-bank lenders are going anywhere soon. As traditional lenders continue to cut back on the number of mortgages they write, non-bank lenders will be there to pick up the new business.
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FAQs
Non bank lenders can provide faster approval processes, more flexible lending criteria, personalized service, and competitive interest rates. However, they may also have higher interest rates for some borrowers, less regulation, and a limited range of financial products.
How do nonbank mortgage lenders work? ›
Because of this, nonbanks fund mortgage loans by using credit — they sell the mortgages to investors while maintaining the responsibility of collecting payment from consumers. Like what you're reading? Click here to learn more about Insider Intelligence's leading Financial Services research.
What credit score do you need for a non-QM loan? ›
Credit History
You can meet the requirements for a non-QM loan even if your credit score is fair or even poor. Most non-QM loans are available for borrowers with a credit score of 620, while some non-QM programs open the door to borrowers with credit scores as low as 580 or even 500.
Who is the largest non-bank mortgage lenders? ›
Rocket Mortgage is the largest non-bank mortgage lender in the United States and largest overall, originating 464,363 mortgages worth $127.6 billion in 2022. What is the difference between a mortgage lender and mortgage broker? A mortgage lender is a financial institution that provides a mortgage.
What are examples of non-bank lenders? ›
Examples of nonbank financial institutions include insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops.
What are the risks with a non-bank lender? ›
While non bank lenders offer some advantages, it is important to consider the potential disadvantages as well: Some borrowers may be subject to higher interest rates compared to traditional banks. This is particularly true for individuals or businesses with poor credit histories or higher risk profiles.
What are the benefits of a non bank lender? ›
To compete with bigger banks, non-bank lenders may offer faster processing times, lower fees or competitive interest rates. Non-bank lenders operate on a smaller scale, which can mean more personalised customer service. A smaller non-bank lender may be more flexible on the terms of a loan to secure your business.
What are the four types of QM loans? ›
There are four types of QMs – General, Temporary, Small Creditor, and Balloon-Payment. Of the four types of QMs, two types – General and Temporary QMs – can be originated by all creditors. The other two types – Small Creditor and Balloon-Payment QMs – can only be originated by small creditors.
What credit score do you need to get a $50,000 loan? ›
You'll have the best chance of getting approved with an excellent credit score, such as one above 800. You may struggle to find a lender that will approve a $50,000 loan for folks with poor or bad credit. A "poor" credit score is considered 580 or under. Most lenders require at least a "fair" score of around 670.
What is the easiest loan to get approved for? ›
What is the easiest loan to get approved for? The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.
Largest Mortgage Lenders in the U.S. by Dollar Amount, 2022, HMDA Data
| Rank | Lender | Amount |
|---|
| 1 | Rocket Mortgage | $127,577,235,000 |
| 2 | United Shore Financial Services (United Wholesale Mortgage) | $127,513,645,000 |
| 3 | Wells Fargo | $78,976,195,000 |
| 4 | Chase | $72,661,605,000 |
6 more rowsJul 31, 2023
Non-QM stands for Non-Qualified Mortgage. These are loans for borrowers who may not meet the requirements of standard loan programs. Non-QM loans typically have a special income qualification. They are designed for people with unique income streams.
How many non-bank lenders are there in the US? ›
The Conference of State Bank Supervisors, a trade association representing state bank regulators, estimates that within the United States there were 19,655 active nonbank mortgage companies as of April 1, 2021. About 80 percent of them were mortgage brokers, which do not make or fund the loans themselves.
What is often true about non-bank credit alternatives? ›
Non-bank credit alternatives, such as payday loans, pawnshops, and car title loans, often have high interest rates. This is due to the higher risk associated with these types of lending, as non-bank lenders often serve customers who are considered high-risk due to low credit scores or unstable income.
What are the largest non-bank financial institutions? ›
| Rank | Profile | Total Assets |
|---|
| 1. | Visa Inc. | $90,499,000,000 |
| 2. | PayPal Holdings | $75,803,000,000 |
| 3. | Mastercard Inc | $38,724,000,000 |
| 4. | Rocket Companies | $32,774,895,000 |
34 more rowsGet to know Pepper Money
We were established in 2000 to help Australians achieve their financial dreams by providing flexible financial solutions that factor in the ups and downs of real life. Since then, we've become one of the largest, most trusted, and award-winning non-bank lenders in Australia and New Zealand.
How do non banks work? ›
Non-banks tend to offer services such as lending, currency exchange, underwriting, and more. However, unlike their banking compatriots, they cannot accept traditional deposits. Some of the most common services that non-banks offer are similar to those from: Lenders (mortgage, market, P2P, etc.)
Why are NPLs bad for banks? ›
Generally, non-performing loans are considered bad debts because the chances of recovering the defaulted loan repayments are minimal. However, having more non-performing loans in the company's balance hurts the bank's cash flows, as well as its stock price.
What are the disadvantages of non traditional mortgages? ›
Since many nontraditional mortgages also have less strict credit and DTI requirements, your rate may be higher to account for the risk of you defaulting on the loan as well. Greater risk of defaulting: While flexible payment options can be very useful, they can also be dangerous to borrowers.
What is the primary reason unbanked households do not have a bank account? ›
The main reason for being unbanked, according to the FDIC study, is cost—those who are unbanked can't meet banks' minimum requirement balances. Another way of looking at it: Traditional banks don't provide access to the financial services and products that unbanked populations need.
