What types of mortgage lenders are there, and how do I choose the right one?

When you’re preparing to buy a home, it can feel overwhelming to compare the different types of mortgages. The good news is that, with so many options, borrowers have many choices to consider when looking for a mortgage.

To help you navigate the home-buying process, we’ve broken down the different lender types, who they most often serve, and how to choose the right option for you.

What is a mortgage lender?

A mortgage lender is a financial institution that provides loans to help you buy a home. Lenders include traditional banks, credit unions, online lenders, mortgage companies, and more.

When you enter a contract with a lender, they’ll set the terms, including the interest rate, repayment schedule, and other important characteristics based on your creditworthiness and financial situation. You will likely have many questions to ask your lender. It’s important to get answers to all your questions so that you fully understand the terms of your loan.

Your lender may also be the company that services your loan, but that’s not always the case. Many lenders sell loans to a different company that will serve as the loan servicer.

Where can you get a mortgage loan?

A mortgage is a type of loan you use to buy real estate. The entities that originate and sell mortgages to borrowers are called mortgage bankers. They either offer direct loans (we’ll talk more about this later) or borrow money from other financial institutions to fund the loans.

After mortgage banks underwrite loans, they often then sell them to Fannie Mae or Freddie Mac or to investors in the secondary market.

There are several different places you can get a mortgage, including a credit union, bank, or mortgage broker. Each comes with different benefits that may be best suited for a different type of borrower.

Each lender sets its own borrowing terms, including interest rates, but they’re indirectly determined by the Federal Reserve’s policy decisions. The Fed sets the federal funds rate based on current economic factors, and that rate, along with additional factors, may indirectly influence many lending products, including mortgages.

Banks

Banks are for-profit financial institutions that offer a variety of products and services, including mortgages. They serve as a go-between for savers and borrowers. People deposit money into their savings accounts, and then banks use that money to offer loans.

Banks can range from small community banks to large national banks. The types of loans available vary from bank to bank. Big national banks usually offer many different loan types, including both conventional loans and government-backed loans.

Credit unions

A credit union is a not-for-profit financial institution. It’s like a bank in that it offers deposit accounts, loans, and other financial products. The key difference is that it holds a not-for-profit status and is owned by its members rather than public shareholders.

Credit unions typically require that you be a member before you can get a loan, and some may have strict membership criteria. However, once you join, you can often access perks like lower interest rates and fees.

Mortgage brokers

A mortgage broker isn’t technically a lender. Instead, it’s a licensed professional who specializes in matching borrowers with the right lenders. They’re independent intermediaries, meaning they don’t work for one specific lender. This means they can help you shop around for the right loan for your situation.

A broker takes on many of the jobs of a loan officer, including processing your application and running your credit and title reports. Then, they’ll get a commission from the lender. But unlike mortgage lenders, brokers don’t underwrite or service loans, and they don’t use their own money to fund the loan.

Different types of mortgage lenders

There are many different types of lenders in the primary mortgage market (i.e., the market where financial institutions offer loans to borrowers). Understanding how these different lenders operate can help you decide which is right for you.

Direct lenders

A direct lender is a financial institution that offers mortgages to borrowers with its own funds and without the help of an intermediary like a mortgage broker.  The lender may then also service the loan, though that’s not always the case. Both banks and credit unions can be direct lenders.

The process of getting a direct loan versus working with a broker likely looks similar on the side of the borrower. You’ll go through the same application and underwriting process, but it may go more quickly, and you’ll work directly with a loan officer at your bank or credit union rather than a third-party individual.

Wholesale lenders

A wholesale lender is a financial institution that originates mortgages but doesn’t offer them directly to borrowers. Instead, wholesale lenders work with brokers and other financial institutions, who market and sell these loans to borrowers.

From the perspective of the borrower, the process of getting a loan from a wholesale lender is the same as with any other lender. You’ll have a similar application and approval process. The only difference is you’ll be working with a third party, such as a broker, rather than directly with the lender.

Wholesale lenders don’t typically service their own loans (though they technically can). They often sell them in a secondary market or to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

Retail lenders

Retail lending is a broad term that spans all loans and credit that banks offer to individual consumers. In the case of mortgages, retail lenders offer personal mortgages to help people buy their homes.

Both banks and credit unions are retail lenders. When you get a loan through a retail lender, you may work with a loan officer at that institution or through a broker.

Portfolio lenders

A portfolio lender is one that originates loans and then keeps them in their own investment portfolios rather than selling them.

Because these loans won’t be sold to GSEs like Fannie Mae or Freddie Mac, they don’t have to meet conforming loan requirements like loan limits, credit score, or debt-to-income ratio (DTI). However, because they are a bit riskier for lenders, they may also have higher interest rates.

Some examples of portfolio loans include jumbo loans and investment property loans.

Online lenders

Online mortgage lenders are those that offer loans online rather than from a brick-and-mortar bank. Unlike traditional banks and credit unions, online lenders don’t have physical branches, but they offer many of the same products and services.

Digital lenders may have a more streamlined process and may even have lower rates or fees to account for their lower overhead. However, you won’t have the experience of working with an in-person loan officer, if that’s something that’s important to you.

Many traditional lenders today offer much of the mortgage process online, so in many ways, the process of getting a loan from an online lender is quite like that of any other lender.

Correspondent lenders

A correspondent lender originates and underwrites a mortgage in their own name but then sells it to a larger financial institution, investor, or GSE.

While a correspondent lender originates the loan, it mostly acts as an intermediary between the borrower and the investor. They take care of the entire mortgage process, from application to approval, but fund the loans with a line of credit rather than their own funds, which creates liquidity and allows them to offer more loans.

Warehouse lenders

A warehouse lender offers short-term loans to mortgage originators to help them fund mortgages. They provide the funds for the mortgage, but they aren’t the ones originating, underwriting, or servicing the loan. Instead, you’ll work with the lender that gets their funding from the warehouse lender.

Hard money lenders

Hard money lenders offer short-term mortgages. Like traditional mortgages, they’re secured by the home being purchased. But rather than lasting for 15-30 years, they must be repaid in a span of months to a couple of years.

Hard money loans are a popular option for real estate investors. For example, someone flipping a home might use a hard money loan to buy and renovate the home and then pay the loan off once they resell the home for a profit.

Rather than being offered by traditional mortgage lenders, hard money loans are usually offered by private lenders or companies.

How to choose the right mortgage lender

With so many different types of mortgage lenders to choose from, you can narrow down your options by considering your personal financial situation and the type of loan you’re looking for. No matter what your situation, whether you’re a veteran or a rural borrower or if your credit isn’t as good as you’d like, you can find a loan that fits.

Here’s how to get started figuring out the right type of mortgage lender for you:

1. Find out what mortgage options they offer

Most lenders provide a list on their website of the loans they offer. You can also consult a loan officer, who can provide more detailed information. Here are some common loan types to consider:

• Conventional loan: A conventional loan refers to any loan that’s not a part of a government program. Conventional loans can be conforming or non-conforming, but most residential mortgages are conforming loans.
• FHA loan: FHA loans are backed by the Federal Housing Administration and are available to borrowers with lower credit scores. They offer low down payments and competitive interest rates.
• VA loan: VA loans are backed by the Department of Veterans Affairs and help veterans and military members, as well as surviving spouses, buy homes without requiring a down payment.
• USDA loan: USDA loans are backed by the U.S. Department of Agriculture. They help low- to moderate-income borrowers in rural areas buy homes without requiring a down payment.
• Jumbo loan: A jumbo loan is a type of non-conforming conventional loan. It refers to any loan that exceeds the loan limits set for conforming loans.
• Reverse mortgage: A reverse mortgage allows borrowers ages 62 and older to pull equity from their homes in the form of cash. Rather than paying into your loan each month, you take money out, and it must be repaid when you leave the home.

2. Compare rates and terms from multiple lenders

When you’re applying for mortgages, it’s important to shop around for the best rate. There are many factors that affect your rate. For example, your credit score, your DTI, your down payment, your repayment term, and more.

Another factor that affects your mortgage rate is whether you choose a fixed-rate or adjustable-rate mortgage (ARM). ARMs generally have lower starting rates than fixed-rate loans, but they can increase later. You can also buy down your interest rate using mortgage points.

The best way to compare rates is to get pre-approved from multiple lenders when you’re shopping for a mortgage. That way, you’ll be able to compare personalized rates and terms from one lender to another.

3. Apply for a loan

Once you’ve chosen the right lender and loan type, you can apply for your loan. To start the mortgage loan process, you’ll fill out an application and provide information about your employment, income, credit history, and more.

Your lender will review your application during the underwriting process, which includes an appraisal. Finally, once the lender has reviewed your application, they’ll approve your loan. When it’s time to close, you’ll pay your down payment and any closing costs.

The bottom line: Choose a mortgage lender who’s there for you

There are plenty of types of mortgage lenders to choose from when you’re buying a home, including banks, credit unions, and mortgage brokers. Depending on the type of lender and loan type you choose, you may work with a direct lender, wholesale lender, or something else.

When narrowing down your options, make sure to consider each lender’s available loan types, interest rates, and other features to help you choose the best loan for your needs. If you’re ready to find out what you may qualify for you can apply with Rocket Mortgage today.