What are the different types of mortgage lenders and how do you choose one?


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The mortgage industry has many types of mortgage lenders, from retail banks to specialty lenders. (iStock)

Researching the different types of mortgage lenders can be a great first step toward buying a home. Not all mortgage loan providers are the same, and some lenders may be better than others in your situation. 

Here’s what to know about the varieties of mortgage lenders you’re likely to come across and why you might choose one over the others.

With Credible, you can compare mortgage rates from various lenders in minutes.​

What is a mortgage lender?

Few people can afford to pay cash for a home, especially if they’re first-time homebuyers. A mortgage lender helps you buy a home and pay for it over time, often 30 years. They have enough cash to pay the seller of the home and then either sell your loan to an investor or manage your monthly mortgage payments themselves. 

Mortgage lenders vs. mortgage brokers

A key thing to note as you’re shopping for a mortgage: A mortgage lender is a financial company that makes a loan directly to you. A mortgage broker, on the other hand, takes a mortgage application and finds a lender. A broker could work with multiple lenders, and you could get multiple loan offers after submitting a single application with a broker.

What are the different types of mortgage lenders?

You’ll find a wide variety of mortgage lenders on the market. Keep in mind that there’s some overlap between categories, and some companies may fall into more than one.

Correspondent lenders

A correspondent lender underwrites and funds your loan with its own money but then sells the loan to a direct lender or to investors through government-sponsored entities Fannie Mae and Freddie Mac. A correspondent lender may still service your mortgage after it’s sold. 

Examples: loanDepot, Rocket Mortgage

Credit unions

Credit unions are financial institutions that are owned by their members. Many of them offer all the financial products you’d expect from a traditional bank, like checking accounts and retirement accounts. Since they’re not-for-profit institutions, credit unions may offer lower rates and fees than other companies. You’ll need to be a member of a credit union to get a mortgage from the institution, and you’ll need to meet certain qualifications to become a member.

Examples: PenFed, State Employees’ Credit Union

Direct or retail lenders

Direct lenders originate home loans directly to you. They could be a traditional bank or a specialty mortgage company, and they typically handle all the processing and underwriting in-house. These lenders may keep your loan in their portfolio for the duration of your mortgage. Direct lenders are also known as retail lenders, and most retail banks fall into this category. 

Examples: SoFi, Wells Fargo

Hard money lenders

Hard money lenders are private lenders that make loans backed by real estate, typically with higher interest rates and shorter loan terms than traditional lenders. That makes these short-term lenders a last resort for most people. Property flippers often use hard money lenders to buy a home, fix it up and resell it quickly. 

Examples: CoreVest, LendingHome

Mortgage bankers

Mortgage bankers can refer to companies or individual people who issue mortgage loans. Mortgage bankers may keep the loans in their own portfolio or sell them to investors on the secondary market, like Fannie Mae and Freddie Mac. Most traditional lenders fall into this category.

Examples: Chase, Wells Fargo

Mortgage brokers

A mortgage broker is distinct from a mortgage banker. Mortgage brokers don’t fund loans themselves, but instead work with banks or lenders that do. Homebuyers might fill out an application with a mortgage broker and then receive offers from multiple lenders.

Examples: Credible, Freedom Mortgage

Online lenders

Online lenders don’t have brick-and-mortar branches like many banks. Instead, they take applications and fund loans through their websites or mobile apps. Loan officers may work with customers over the phone. 

Examples: Better, SoFi

You can use Credible to compare mortgage rates without affecting your credit.

Portfolio lenders

Portfolio lenders originate mortgages and hold onto them for the duration of the loan rather than selling them to investors. Large lenders may do this with their own loans they issue that don’t fit neatly into the rules set by Fannie Mae and Freddie Mac. Some lenders focus exclusively on these loans as an option for people who don’t qualify for traditional mortgage products. 

Examples: LendingOne, North American Savings Bank

Warehouse lenders

Warehouse lenders give lines of credit to mortgage bankers to help them finance new mortgages that are then sold to investors. As a homebuyer, you won’t interact with warehouse lenders — but the mortgage banker you work with may. Large banks may both originate mortgages themselves and offer warehouse lines of credit to other mortgage bankers. 

Examples: Axos Bank, Flagstar Bank

Wholesale lenders

A wholesale lender is a company that doesn’t deal directly with consumers, but instead, funds mortgages brought to it by a mortgage broker. Large banks and lenders may offer wholesale lending as an option along with direct lending. 

Examples: Freedom Mortgage, loanDepot

Mortgage lender pros and cons

As you decide which type of mortgage lender to work with, here are a few benefits and drawbacks of the main categories you may run into.

Credit unions

Pros

  • May have lower rates — Because credit unions are not-for-profit institutions, they may offer lower interest rates than traditional banks.
  • May have lower fees — Credit unions often offer lower fees than their competitors.
  • In-person service available — Your local credit union may have branches and mortgage bankers nearby that you can meet with in person.

Cons

  • Requires membership — Credit unions require you to become a member to access many of their services, usually through a small fee and opening a savings account.
  • May have fewer offerings — Your credit union may have a smaller product offering than other lenders.
  • May only work in a small area — Credit unions often only serve customers in their immediate geographic area.

Direct lenders

Pros

  • Straightforward process — Direct lenders typically perform their entire process in-house, meaning the loan officer, underwriters and other employees are part of the same company. This can make it easier to keep things from falling through the cracks.
  • In-person service — Many retail lenders have branches available around the country where you may be able to meet with a mortgage banker in person.

Cons

  • Must shop around ahead of time — Working with a direct lender means you only get loan options from one company. You’ll want to shop around ahead of time before settling on a direct lender.
  • Options may be limited — Depending on the direct lender you choose, you may not have access to the loan product that’s best for you. Your loan options will be limited to what that lender offers.

Mortgage brokers

Pros

  • Can get multiple offers — Brokers often work with several different lenders, giving you the chance to evaluate offers from multiple sources to find the best deal.
  • Single point of contact — Brokers will guide you through the mortgage process, offering you one person to call when you have a question.
  • Wide variety of loan types — Mortgage brokers often have the ability to find the type of mortgage that works best for you.

Cons

Portfolio lenders

Pros

  • More lenient qualifications — Because portfolio lenders don’t sell their mortgages to investors, they don’t have to follow the stringent guidelines of Fannie Mae and Freddie Mac. This may make it easier for you to qualify.
  • Steady service — Since your loan won’t be sold, you’ll likely work with the same servicer for the life of your loan.
  • Flexible terms — Portfolio loans often offer more flexible terms than the rigid 30-year or 15-year mortgages you might find elsewhere.

Cons

  • May have higher interest rates — Because it’s riskier to keep loans than to sell them, portfolio lenders may charge higher interest rates than you’d find elsewhere.
  • May have higher fees — Portfolio lenders may charge higher fees and closing costs on your loan.
  • May be harder to find — You’ll likely have fewer options if you’re looking for a portfolio lender than if you wanted to work with a direct lender.

How to choose a mortgage lender

As you begin the process of searching for a mortgage loan, carefully weigh the type of lender that may work best for your situation. Be sure to shop around multiple lenders and even multiple types of lenders. Before getting too far along, consider these questions: 

  • What type of loan works best for you? If you’re a military service member or veteran and know you want a VA loan, for example, you may want to choose a lender who specializes in this product.
  • Do you want in-person service or are you comfortable working over the phone? Some lenders have mortgage bankers in your area, while others will manage the mortgage application online or by phone.
  • Where can you get the best rates? This is where shopping around is most important. You can get rate quotes from multiple lenders without a penalty to your credit score as long as you do it within a 45-day window.
  • Who offers the lowest fees? As you’re shopping, pay attention to the fees as well as the mortgage rates. Consider how much you have in…



Read More:What are the different types of mortgage lenders and how do you choose one?

2022-01-13 15:20:31

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