We get this question a lot! So if you’re here for the one sentence explanation, here it is: We make money by selling our loans to end-investors in the secondary market. To get a sense of how this all works, let’s first take a look at how traditional lenders make money.
Background: How lenders make money
There are a few ways lenders typically make money:
- Commission on the price of the loan
- Charging lender fees, such as application, processing, origination, or underwriting fees
- Making money on the monthly mortgage payment (if they don’t sell the loan)
- Selling loans (and the interest payments that come with them) to end-investors
Now let’s take a look at the different players in the mortgage market.
Background: The Mortgage Players
Borrowers are people like you or me who need a loan – either to buy a home or to refinance their current mortgage.
Mortgage brokers act like middlemen by helping borrowers compare lenders and apply for loans. Brokers typically make money by charging a fee – either upfront, as part of closing costs, or built into the final rate. Working with a broker is optional, and many borrowers go directly to lenders to shop around instead.
Simply put, a mortgage lender provides loans. Sometimes called “direct lenders,” they can include local lenders, credit unions, national banks (like Wells Fargo, Chase, or Bank of America), and online lenders (like us at Better Mortgage). Lenders review, verify, and approve a borrower’s application, then lend the borrower the money they need to buy or refinance their home. (This process is sometimes referred to as “origination.”)
Although lenders may eventually sell their loans to an end-investor, they are still responsible for ensuring that their borrowers will likely be able to pay back their loans. That’s why ever since the housing crisis, lenders typically use strict, industry-standard underwriting guidelines to approve applications.
Lenders often sell the loans they’ve originated to end-investors. These investors can include big banking institutions like Chase, Wells Fargo, and Bank of America (which typically have separate departments for lending and investing), other private investors, and government-sponsored enterprises like Fannie Mae. Again, since the housing crisis, investors also typically have strict requirements for the loans they will buy, and it is the lender’s job to make sure their loans meet these requirements.
Servicers and subservicers
Sometimes lenders or end-investors hire third-party companies called subservicers to collect and process loan payments made by borrowers. Other times, the lender or end-investor acts as the servicer themselves and processes payments in-house. In other words, the person in the to line on your check.
So how does Better make money without charging commission, fees, or servicing?
Better doesn’t charge its borrowers any lender fees. We don’t pay our Mortgage Experts commission (so they can focus on support, not sales). And we don’t make money on interest payments, since we sell our loans to end-investors. So let’s dig into how we’re still able to offer the most affordable loans possible to our customers.
1. Our technology finds the best investor matches for our borrowers
Just like a retirement account is made up of different types of investments (bonds, overseas stocks, index funds, etc.), investors in the secondary market are also looking for different types of mortgage loans to make up their portfolio. At Better Mortgage, we’ve developed relationships with over 25 of the largest mortgage investors in the world, from large banks to investment funds to government-sponsored entities like Fannie Mae (most lenders only work with a handful of investors). We then use our technology to match our borrowers with the investors who are most interested in buying their loans (and are therefore willing to pay a good price for them). This, in turn, allows us to offer the lowest possible rates to the borrower.
Our matching technology is especially helpful if you have a unique financial situation, such as getting compensated through RSUs. It also allows us to easily find personalized discounts that you may be eligible for, so we can pass those savings on to you.
2. We streamline the mortgage process so we can pass the savings on to borrowers
Our technology goes beyond our investor-matching algorithm. We’ve also worked hard to streamline the entire mortgage process, so it’s just cheaper for us to make the loan than a traditional lender, saving our borrowers money. Plus, we’ve eliminated commission structures, which amounts to lowering the cost of transacting by 1%. In 2017, we were able to save borrowers an average of $3500 on transaction costs alone -- this is above and beyond the savings we’re able to help the borrower realize over the life of the loan by offering lower rates.
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