The main types of mortgage lenders are banks, credit unions, and online banks, but there are many more types of mortgage lenders. Rates and terms can vary significantly by individual lender. Shopping for a mortgage loan can feel confusing and a little intimidating. Understanding the differences between these main types of mortgage lenders can help you narrow your choices to find the best fit for you.
Key Takeaways
- Different types of mortgage lenders include banks, credit unions, and online banks.
- Each mortgage lender will have its own terms, interest rates, and fees.
- Consider the advantages and disadvantages of each mortgage lender to determine the right fit for you.
- The right type of mortgage lender for you will depend in part on your personal circ*mstances.
What Is a Mortgage Lender?
A mortgage lender is a bank, credit union, or other financial institution that provides financing for home purchases and refinances. Sometimes, they may also offer second mortgages, such as home equity loans or home equity lines of credit.
Mortgage lenders have specific borrowing guidelines to verify your creditworthiness and ability to repay a loan. They set the terms, interest rate, repayment schedule, and other key aspects of your mortgage, and these factors can vary from lender to lender.
Types of Mortgage Lenders
There are several different types of mortgage lenders. Understanding how they work and their pros and cons can help you better evaluate your options and choose the right type of mortgage lender for you.
Type of Lender | Key Features |
---|---|
Mortgage Broker | Helps you find a lender; doesn't provide loans directly |
Mortgage Banker | Borrows money from warehouse lenders to issue loans; sells loans on the secondary market |
Retail Lender | Provides loans directly to consumers; may also offer other banking products and services |
Direct Lender | Provides loans directly to consumers; typically doesn't offer other financial products and services |
Portfolio Lender | Sets its own terms and eligibility criteria; may offer more flexibility compared to other types of lenders |
Wholesale Lender | Funds and services loans through third-party lenders; doesn't work directly with consumers |
Correspondent Lender | Originates and funds mortgage loans and then sells them to investors; may continue to service loans after selling them |
Warehouse Lender | Provides short-term financing to other mortgage lenders to fund loans; does not work directly with consumers |
Hard Money Lender | Non-traditional lender; may offer more flexibility than portfolio lenders, but with higher costs and shorter repayment terms |
Mortgage Brokers
Mortgage brokers work with a host of different lenders to help you find a loan. You may consider a mortgage broker if you want assistance shopping around for a loan, but you'll still want to do your own research to ensure you're getting the best deal possible.
Advantages of Mortgage Brokers | Disadvantages of Mortgage Brokers |
Can save you time shopping around | May charge a broker fee |
May offer access to lenders you can't work with directly | Some lenders won't work with brokers |
Can help you reduce fees | Often no guarantee of estimates |
Mortgage Bankers
Mortgage bankers borrow money at short-term rates from warehouse lenders to fund the mortgages they issue to consumers.
Shortly after a loan closes, the mortgage banker may sell it on the secondary market to Fannie Mae or Freddie Mac or to private investors to repay the short-term note. Most mortgage lenders in the U.S., including retail and direct lenders, are mortgage bankers.
Advantages of Mortgage Bankers | Disadvantages of Mortgage Bankers |
Widely available | Less flexible with eligibility requirements |
Offer standard and specialized loan options | May offer less flexibility with loan options and terms |
May offer other financial products and services |
Retail Lenders
Retail lenders provide mortgages directly to consumers, not institutions. Retail lenders include banks, credit unions, and mortgage bankers. Consider a retail lender if you want to work with a lender that also offers other products, such as checking accounts, savings accounts, personal loans, and auto loans.
Advantages of Retail Lenders | Disadvantages of Retail Lenders |
Offer a wide range of financial products and services | May have stricter eligibility requirements compared to direct lenders |
Don't require an intermediary, such as a broker | Some may offer fewer home loan options |
Some offer a wide range of home loan products | Won't help you shop around |
Direct Lenders
Direct lenders originate their own loans. These lenders either use their own funds or borrow them from elsewhere. But unlike retail lenders, direct lenders typically don't offer other financial products and services. They specialize in home loans only.
As a result, some direct lenders may have less stringent eligibility requirements, making them worth considering if you're worried about qualifying for a loan.
Advantages of Direct Lenders | Disadvantages of Direct Lenders |
May have less stringent requirements compared to retail lenders | Don't offer other financial products and services |
May offer more home loan options | May be less flexible than portfolio and hard money lenders |
May offer faster funding | May be smaller and harder to find than retail lenders |
Portfolio Lenders
A portfolio lender funds loans with its own money and, therefore, isn’t beholden to the demands and interests of outside investors. Portfolio lenders set their own borrowing guidelines and terms, which may appeal to borrowers who are looking for something outside of what traditional lenders offer.
For example, someone who needs a jumbo loan or is buying an investment property might find more flexibility in working with a portfolio lender.
Advantages of Portfolio Lenders | Disadvantages of Portfolio Lenders |
Offer more relaxed eligibility requirements | May charge higher interest rates |
Can provide non-traditional loan options | May require higher down payments |
May be a better fit for investment properties | More likely to charge prepayment fees |
Wholesale Lenders
Wholesale lenders are financial institutions that offer loans through third parties, such as mortgage brokers, other banks, or credit unions. Wholesale lenders don’t work directly with consumers, but originate, fund, and sometimes service loans. Many mortgage banks operate both retail and wholesale divisions.
You may consider a wholesale lender if there aren't many retail lenders in your area, or if you want more flexible requirements.
Advantages of Wholesale Lenders | Disadvantages of Wholesale Lenders |
Could offer more competitive rates | No direct contact with borrowers |
Potentially more loan options | Potentially higher fees |
Can be helpful if there are few lenders in your area | You'll typically need to work with a broker |
Correspondent Lenders
A correspondent lender is a lender that originates and funds a mortgage loan and then sells it to investors, such as Fannie Mae and Freddie Mac or a government agency. That said, the correspondent lender may continue to service your loan.
Most mortgage lenders are correspondent lenders.
Advantages of Correspondent Lenders | Disadvantages of Correspondent Lenders |
Works directly with borrowers | Can have strict underwriting criteria |
May not require you to work with a third party | May switch your servicing to another financial institution |
May offer more loan options | May charge higher fees |
Warehouse Lenders
Warehouse lenders help mortgage bankers fund their own loans by offering short-term funding. Warehouse lines of credit are usually repaid as soon as a loan is sold on the secondary market. Like wholesale lenders, warehouse lenders don’t interact directly with consumers, so it's not an option you can choose.
Advantages of Warehouse Lenders | Disadvantages of Warehouse Lenders |
You'll work directly with your lender rather than an intermediary | Options are limited to retail lenders |
No third-party relationships until after closing | Your loan will be sold after funding |
May have stricter requirements |
Hard Money Lenders
Hard money lenders are often the last resort if you can’t qualify with a portfolio lender or if you renovate homes to resell quickly. These lenders are usually private companies or individuals with significant cash reserves. Hard money loans generally must be repaid in a few years, so they appeal to fix-and-flip investors who buy, repair, and quickly sell homes for profit.
While hard money lenders tend to be flexible and close loans quickly, they charge hefty loan origination fees and interest rates, and they require a substantial down payment.
Advantages of Hard Money Lenders | Disadvantages of Hard Money Lenders |
Relaxed eligibility requirements | High interest rates and fees |
Willing to work with real estate investors | Short repayment terms |
Can offer fast closing | High down payment requirements |
How to Choose the Right Mortgage Lender for You
With so many options, it's important for you to take time to understand your financial situation, needs, and objectives, and to research all of your options. In particular, here are some factors to consider.
- Loan options: Learn about the different types of mortgage loans to determine which one is right for you. Then, focus on lenders that offer the loan program you're considering.
- Eligibility requirements: Look at your credit score, income, and other eligibility factors that could impact your ability to get approved. If you're having a hard time getting approved with a retail or direct lender, you may consider a portfolio lender or even a hard money lender.
- Rates and terms: Once you've decided on a type of mortgage lender, shop around and compare interest rates, closing costs, and repayment terms to determine which lender offers the best deal.
- Convenience: If your bank or credit union offers mortgage loans, it could be worth it to keep all of your finances under one proverbial roof. However, consider this only if the loan terms and costs are competitive.
- Reputation: Research online reviews of each lender you're considering to get an idea of what your experience might look like.
While some lenders may offer less stringent requirements, it's important to carefully consider the costs associated with those loans. In some cases, it may make sense to work on improving your creditworthiness instead of choosing an expensive loan.
Frequently Asked Questions (FAQs)
What Are the Three Main Types of Mortgages?
Some of the main types of mortgage loans include conventional loans, government-backed loans, and jumbo loans.
- Conventional loans: These are loans that aren't backed by a government agency.
- Government-backed loans: These loans are offered through government programs. Examples include Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and VA loans (backed by the U.S. Department of Veterans Affairs).
- Jumbo loans: Jumbo mortgages are larger than the conforming loan limits set for conventional or government-backed loans.
What Are the Types of Lenders?
There are several different types of mortgage lenders, including:
- Mortgage brokers
- Mortgage bankers
- Retail lenders
- Direct lenders
- Portfolio lenders
- Wholesale lenders
- Correspondent lenders
- Warehouse lenders
- Hard money lenders
What Is the Most Popular Type of Mortgage Loan?
Conventional loans are the most common type of mortgage loan, making up 73% of all originations in 2023, according to U.S. Census Bureau data.
What Is the Easiest Type of Mortgage to Get?
Among traditional loan options, government-backed loans tend to be easier to obtain than conventional loans. However, if you don't qualify for a conventional loan, you may consider a loan with a portfolio lender or even a hard money lender.
The Bottom Line
Finding the right lender and loan can feel daunting. Researching and educating yourself before you start the process will give you more confidence to approach lenders and brokers.
You might have to go through the pre-approval process with a few lenders to compare mortgage rates, terms, and products. Have your documentation organized and be frank about any challenges you have with credit, income, or savings so lenders and brokers offer you products that are the best match.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Consumer Financial Protection Bureau. “What Is the Difference Between a Mortgage Broker and a Mortgage Lender?”
U.S. Census Bureau. “Table Q1. New Houses Sold by Sales Price: United States,” Page 7.
Part of the Series
When to Buy a Home Based on Mortgage Rates
How Mortgages Work
- When to Buy a Home Based on Mortgage Rates
- Overview
- Shopping for Mortgage Rates
- Pre-Approvals You Need
- Mistakes to Avoid
- Locking In the Rate
Rates for Different Loan Types
- Points and Your Rate
- How Much Do I Need to Put Down on a Mortgage?
- Understanding Different Rates
- Fixed vs. Adjustable Rate
- When Adjustable Rate Rises
- Commercial Real Estate Loans
Best Mortgage Rates
- Best Mortgage Rates Today
- Best Jumbo Mortgage Rates
Saving on Fees
- Closing Costs
- Avoiding "Junk" Fees
- Negotiating Closing Costs
- Lowering Refinance Closing Costs
Lender vs. Broker
- Types of Lenders
CURRENT ARTICLE
- Applying to Lenders: How Many?
- Broker Advantages and Disadvantages
- How Loan Offers Make Money
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