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In-house Financing

In-house financing refers to the practice of banks keeping a mortgage loan they write rather than selling it to a third party such as Fannie Mae or Freddie Mac.

In-house financing refers to the practice of banks keeping a mortgage loan they write rather than selling it to a third party such as Fannie Mae or Freddie Mac.

In most cases, banks prefer to sell mortgages they write to these third parties for a few reasons. First, selling a mortgage allows the lender to replenish the money they loaned out. Then, lenders take the money received from selling a mortgage to then make more mortgage loans. If they had not sold the loan, they would have to wait for enough payments to come in to accumulate enough money to make another loan. Selling loans to third parties speeds up the process significantly.

Benefits to Banks

However, different banks have different goals. Some banks prefer in-house lending and aim to keep some mortgages they write. In-house financing allows banks to pick and choose which loans they think will perform the best for their goals. Banks almost always want to benefit from the in-house lending arrangement. Usually, this means you, as the consumer, will end up paying more for the loan in either up front costs or a higher interest rate. Another way in-house financing can benefit banks is using it as a method to keep key bank customers by offering special mortgage terms not available to a traditional customer.

Unfortunately for the banks, in-house lending also comes with risk. If the home buyer defaults on their mortgage, the bank will be directly affected by the missed payments and may even have to foreclose on the home themselves. If there is a major housing crisis and many in-house loans fail at the same time, it could cause the bank itself to fail.

Benefits to Consumers

Of course, banks wouldn't offer in-house loans unless there was a demand for it. Bank customers can benefit from in-house lending as well. One major benefit of in-house financing for consumers is the fact they may be able to obtain a mortgage when they wouldn't qualify for a mortgage under traditional lending programs. Some in-house lending programs exist to help people that don't fit the typical home buyer mold. Whether you have never had credit in your life or you had an extenuating circumstance that damaged your credit badly but have since recovered, banks can assess the risk of taking on a mortgage due to your particular situation as it sits today. Since banks keep in-house mortgages on their own books, they don't have to meet the often strict lending guidelines required to sell the mortgage to a third party.

In-house financing can be great for people who need it to qualify for a mortgage. On the other side, people who easily qualify for traditional mortgages may be better served by going through the traditional mortgage process rather than the in-house lending process. As always, it is best to shop around with all of your financing options, especially with a purchase as large as home. You never know whether an in-house financing loan or a traditional mortgage loan will be better for your situation until you get quotes and compare the offers. Finding a loan that is just slightly better could easily save you thousands of dollars over the life of the loan.