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

When you want to buy a home, you might wonder about the types of mortgages and lenders available to you. Should you work with a credit union or a mortgage broker? Well, you have lots of choices!

We’ll go over how to choose a mortgage lender and offer a few tips to consider to help you narrow your options when searching for the right loan and lender.

What is a mortgage lender?

A mortgage lender is a financial institution or mortgage bank that offers and underwrites home loans. Mortgage lenders set the terms, interest rate, repayment schedule and other key aspects of your mortgage. Before you can get a loan, mortgage lenders will verify your creditworthiness and ability to repay a loan.

Mortgage lenders are one of the most important parties involved in the mortgage process. They are typically the first party a prospective buyer will work with.

Where can you get a mortgage loan?

Let's talk about where you can apply for a mortgage loan, how the application process works for each mortgage company and what each type of mortgage lender offers borrowers.

Credit unions

Credit unions are not-for-profit organizations owned by their members. They focus on serving their members instead of earning a profit. To get a mortgage with a credit union, you must meet its membership requirements.

Credit unions may offer a limited number of loan products. Inquire about loans at your local member branch. Ask them which mortgage loans they offer and their requirements.

Most credit unions generally require you to submit an application, identification (such as your Social Security number), proof of income and a down payment. The credit union will also evaluate your creditworthiness.

Mortgage bankers

A mortgage banker is a person or entity that supports you in getting a mortgage.

Most mortgage lenders in the U.S. are mortgage bankers. Large banks, online mortgage lenders and credit unions all fall under the mortgage banker umbrella.

But let's distinguish between credit unions and banks. Banks are for-profit organizations, while credit unions are not-for-profit organizations. Anyone can do business with a bank, but to work with a credit union, you must be a member to qualify for a mortgage.

A bank originates (processes), services and sells many types of mortgage products. They may offer 30-year fixed-rate mortgages, 15-year fixed-rate mortgages, adjustable-rate mortgages (ARMs), government-backed mortgages, jumbo mortgages and interest-only mortgages.

Sometimes banks keep your loan in their portfolio and service it, but it’s more likely that they’ll sell it on the secondary market to Fannie Mae and Freddie Mac or sell the servicing rights to another party.

You can also refinance an existing mortgage through a mortgage banker.

A mortgage banker will ask for proof of income, credit documentation, proof of assets and information about your debts and liabilities to determine whether you qualify for a mortgage.

Mortgage brokers

Think of a mortgage broker as a licensed, regulated financial professional who works with you and a mortgage lender. The major difference between a mortgage banker and a mortgage broker is that mortgage bankers work directly with borrowers, and mortgage brokers act as an intermediary between you and your lender and don’t lend money to borrowers.

A broker pulls your credit history and gathers documents such as your income, assets and liability information. They use this data to match you to appropriate loans.

A mortgage broker may save you time and money when you don't have enough time to research and find the right lender.

Different types of mortgage lenders

Let's go over the main types of lenders in the primary mortgage market and their main characteristics.

Federal Reserve policy decisions and other market-based factors will influence the interest rates offered by lenders in the primary mortgage market. Personal factors, such as your credit score, income, debt and more, can also influence the interest rate you pay.

Direct lenders

direct lenders originate their loans. They use their funds or borrow money from somewhere else. Direct lenders often raise capital from investors to offer loans directly to borrowers. Two good examples of direct mortgage lenders are mortgage banks and portfolio lenders.

Direct lenders can walk you through the mortgage process without involving intermediaries like mortgage brokers. They can process, underwrite and close your loan.

You'll use the same process to apply with a direct lender as you would with a mortgage broker. Direct lenders work best if you want a speedier loan process.

Wholesale lenders

A wholesale mortgage lender funds mortgages and offers them to third parties – banks, credit unions and mortgage brokers, for example.

Borrowers never come in contact with wholesale lenders, who match borrowers with the appropriate loan based on their qualifications. Borrowers only work with their bank, credit union or mortgage broker throughout the application process, and the underwriting process stays in-house with the third party.

Wholesale lenders usually sell their loans on the secondary market shortly after closing, which means they sell their loans to Fannie Mae and Freddie Mac.

Retail lenders

Retail lenders offer mortgages to consumers, not institutions. They work directly with prospective home buyers to complete a real estate transaction. Credit unions, mortgage bankers and banks fit the description of retail lenders. They sell multiple loan products and handle loans in-house.

You may want a mortgage loan from a retail lender if you're looking for a wide variety of mortgage options and want to pick the best one for you.

Portfolio lenders

A portfolio lender uses its money to originate mortgages. A community bank is a good example of a portfolio lender.

Portfolio loans are nonconforming loans, so they can’t be sold on the secondary market. A portfolio lender keeps loans in its portfolio rather than sell them to Fannie Mae and Freddie Mac. Because portfolio lenders hang on to their loans, they can offer less stringent lending criteria than conventional banks.

Borrowers who don’t meet Fannie’s and Freddie’s guidelines may want to work with a portfolio lender. For example, you could work with a portfolio lender if you need a larger-than-average loan, like a jumbo loan.

A portfolio lender may even make an exception and work with a client with a less-than-ideal credit score because they have a good working relationship with them.

Because portfolio loans are considered higher-risk loans, lenders often charge higher interest rates, closing costs and fees.

Online lenders

Online lenders offer an alternative to traditional banks. An online mortgage lender can originate loans online or also operate through brick-and-mortar locations.

Because online lenders typically don’t have overhead costs from in-person locations, they can pass their savings to customers, offering lower interest rates and fees, which can help you save thousands of dollars over the life of your loan.

While online lenders are an alternative to traditional banks, you'll still need to meet the standard requirements to get a loan.

Correspondent lenders

Correspondent lenders originate, underwrite and fund mortgage loans using their own name. Then they sell their loans to a larger mortgage lender that takes on the responsibility of servicing the loan, which includes tasks such as handling mortgage payments and more. The larger lender may choose to sell the loan on the secondary market.

A correspondent lender funds a mortgage using a separate line of credit. After the closing and the sale of the mortgage to a larger lender, a correspondent lender uses the proceeds from the sale to pay off the line of credit. Once ownership of your mortgage loan is transferred, you’ll send your monthly mortgage payments to your new mortgage servicer.

You may experience a faster turnaround with a correspondent lender because underwriting and loan approval are handled in-house. You may even be exposed to more mortgage options with correspondent lenders because they work with a wide variety of mortgage investors.

To qualify for a correspondent loan, you must follow specific policies. And the lender may charge extra fees.

Warehouse lenders

Warehouse lenders offer short-term financing loans. Once they sell their loans on the secondary market, warehouse lenders repay their line of credit. Warehouse lenders don’t interact with borrowers. And the mortgages are used as collateral until a mortgage bank or correspondent lender purchases the loan.

Hard money lenders

House flippers and other real estate investors often use hard money loans to renovate homes to resell quickly or because they can’t qualify for a portfolio loan. With hard money loans, the property is used as collateral for the loan, and the loan must be repaid within a few years. If the borrower defaults on their loan, the lender will take possession of the property.

Hard money lenders are typically privately funded companies or wealthy individuals. They typically charge a substantial loan origination fee and require larger down payments. Their loans often have higher interest rates than conventional loans.

How to choose the right mortgage lender

The goal is to choose a mortgage lender that’ll provide the best service for your needs and goals. First-time home buyers may want to work with a lender that can provide in-depth, jargon-free answers to their questions and explain all their mortgage options. If you want to refinance your mortgage, you’ll need to find a lender that offers refinance loans. If you're a qualified veteran or active-duty service member or have bad credit, you may be in the market for a lender that offers government-backed loans.

Asking the right questions based on your situation can help you make the best decisions and get the best mortgage possible. Let’s explore the steps to choosing the right lender for you.

1. Find out what mortgage options they offer

Ask the mortgage lenders you’re interested in whether they offer the type of loan you need to purchase a home. If you want to use a Department of Veterans Affairs (VA) loan or a Federal Housing Administration (FHA) loan, verify that your lender candidates offer that loan type.

2. Compare rates and terms from multiple lenders

Whether you’re interested in a fixed-rate mortgage or an adjustable-rate mortgage (ARM), check terms and rates when comparing lender loan offers. Your credit score will have the biggest impact on the rates you get from lenders.

Mortgage interest rates are influenced by the Federal Reserve. When the Fed makes it more expensive for banks to borrow, banks pass the cost on to consumers and raise mortgage rates. If you want to reduce your rate, some lenders allow borrowers to buy down their mortgage rates by purchasing mortgage points that lower their interest rates.

3. Apply for a loan

Once you’ve selected a lender, you can start the application process. When applying for a loan, the method you choose is a factor to consider. For example, if you opt for an online application, you’ll likely need to choose an online lender.

No matter which type of lender you choose, you’ll likely be required to provide proof of income, your lender may perform a hard credit check, and you’ll need to meet the loan’s down payment requirements.

The bottom line

You can choose from many different mortgage lenders, including credit unions, mortgage bankers and mortgage brokers. You can also work with direct lenders, wholesale lenders, retail lenders, portfolio lenders, online lenders, correspondent lenders and more.

While you may discover many available loan options, your goal is to narrow your options and choose a mortgage lender and loan that meets your needs. Do your due diligence and research the different types of mortgage lenders.

Are you ready to work with a lender? Apply for a mortgage loan with Rocket Mortgage® today.