Bank versus lender

Often the question is asked of us from people and businesses looking for a mortgage: “What is the difference between a bank and lender”.  They are usually responding to our mortgage quote that they receive indicating the different financing options available from a Traditional Bank and a Mid Market or Private Lender.  The following provides some guidance when considering the difference between banks and lenders.

1.  Term

Banks look to lend for longer periods of time versus lenders who typically look to lend for shorter periods of time.  The rationale is that because of the cost structure of a bank and their tolerance for risk they will look at opportunities that have a longer term so that they can earn back not only their costs but profit.

For exactly the opposite reasons lenders have a much lower cost structure and higher tolerance for risk which gives them the ability to lend for shorter terms by approving deals that a bank will not.  Both Mid Market and Private lenders have carved an opportunity for themselves by providing financing for projects or properties that a Traditional Bank cannot or will not.

2.  Tolerance for risk

Lenders will charge more for their money then a bank will.  Their fees are higher and their interest rates are higher however keep in mind that they are providing financing for projects or properties that banks won’t.  Certainly the term of the financing is a significant consideration.  Most times, when using a lender, a borrower will be looking to achieve something in a short period of time that doesn’t fit the requirements of long term financing.

For example, a family may be looking to close on the purchase of a new home.  The closing date for the new home is set for the 13rd of the month but the sale of their existing home won’t happen until the 27th of the same month.  Their down payment for the new home is coming from the sale of their existing home but they have a 14 day problem.  In this case they may use a lender to help them close on the purchase of the new home and repay the lender once their existing home has sold.

Another  example would be a developer requiring a mortgage to close on some land but the bank has told them that financing will only be available once the developer has  commitments from builders to buy lots.  The developer in this case may use a lender to help close on the purchase of the land and using a Mid Market or Private lender they will have time to sell lots and meet the bank’s criteria.  Once interest from builders in purchasing lots has been agreed to, the developer would then go the bank and get a mortgage for development of the land.

3.  Payment type

Lastly, the payment type of a bank or lender can be different.  Banks offer amortized payments and lenders offer interest only payments.  There are exceptions to this however an amortized payment will mean that every month the interest is paid and some principal.  With an interest only payment, the principal balance stays the same and is not reduced.  At the maturity of a mortgage from a bank, you will owe less then when you first received the mortgage.  At the maturity of a mortgage from a lender, you will owe the same amount they lent you.  Again, it is important to keep in mind that lenders provide short term mortgages – usually less than 36 months.  If you need financing for a longer period of time you will want to make sure that you get a mortgage from a bank or at least have a plan to financing from a bank.

There are many other differences between banks and lenders including type of security they need, type and amount of personal and corporate guarantees in addition to conditions that need to be met prior to funding.  Before you spend time shopping around, determine what type of financing you need to save you frustration and delays that arise of going to the wrong type of bank or lender for your mortgage request.

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