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What Types Of Mortgage Lenders Are There, And How Do I Choose The Right One?

Melissa Brock8-minute read

July 04, 2021


When you want to buy a home, you might wonder about the types of mortgages and lenders you'll have access to. Should you choose a credit union? A mortgage broker? 

Luckily, you have lots of choices! We’ll go over how to choose a mortgage lender and give you a few tips on the types of lenders for mortgages. That way, you can start researching and narrow your decision to just one option.

Where Can You Get A Mortgage Loan?

Let's talk about where you might want to apply for a mortgage loan, how it works for each type of mortgage company, and what each type of company can do for borrowers.

Credit Unions

Credit unions are not-for-profit organizations that members own. They focus on serving their members instead of earning a profit. Therefore, you must meet membership requirements in order to get a mortgage with a specific credit union. They often offer lower loan rates and reduced fees.

Credit unions offer standard mortgage products, including adjustable-rate mortgages (ARMs), which don't have a fixed interest rate. They also offer government-backed mortgages, which offer insurance by a government agency, such as the Federal Housing Administration (FHA loans), the Veterans Administration (VA loans) and the U.S. Department of Agriculture (USDA). They also offer fixed-rate mortgages. You can also choose refinancing through a credit union.

Credit unions usually offer a limited number of loan products – inquire at the branch where you are a member to find out more and ask about the basic requirements. However, they are more likely to hang on to the loans they originate and keep your mortgage on their books through the life of your loan.

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

Mortgage Bankers

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

Most mortgage lenders in the U.S. are mortgage bankers. They include large banks, online mortgage lenders or credit unions.

Even though a mortgage bank includes large banks, online mortgage lenders and credit unions, let's draw a distinction between credit unions and banks: Banks are for-profit organizations, while credit unions are nonprofit organizations. In addition, anyone can do business with a bank, but with a credit union, you must be a member to qualify for a mortgage.

A bank originates (initiates), services and sells a wide variety of mortgage products. They may offer 30-year fixed-rate mortgages, 15-year fixed-rate mortgages, ARMs, government-backed mortgages, jumbo mortgages and interest-only mortgages, for example.

A bank can keep your loan in their portfolio and service it. They may also choose to sell it on the secondary market or sell the servicing rights to another party. Mortgage bankers typically sell conventional mortgages to Fannie Mae and Freddie Mac.

You can also choose to refinance your current mortgage through a mortgage banker.

A mortgage banker will ask you for proof of income, credit documentation, proof of assets and information about your liabilities to determine whether you qualify for a particular type of mortgage. A bank may require you to submit other information as well.

Mortgage Brokers

You can 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 homeowners and mortgage brokers act as the intermediary between you and that institution. Mortgage brokers do not loan money themselves.

They gather documents from you, such as information about your income, assets and your liabilities. Mortgage brokers pull your credit history. They assemble all of these details and get you information about loans. They also negotiate terms during a short time frame.

Mortgage brokers may charge you around 1% – 3% of the loan amount, but you should check with individual mortgage brokers to find out how much they will cost you.

A mortgage broker can save you time and money when you don't have the chance to find the right lender on your own.

Mortgage Lenders

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.

Different Types Of Lenders In The Primary Mortgage Market

Now, let's go over the main types of lenders in the primary mortgage market you might encounter and their main attributes.

In all cases of the various lenders in the primary mortgage market, the Federal Reserve will affect interest rates you can get. Other market-based factors also influence the interest rate you'll pay. Your personal factors, such as your credit score, income, debt and more may influence the interest rate you get.

Direct Lenders

Direct lenders originate their own loans. These lenders either use their own funds or borrow from somewhere else. Two good examples of mortgage lenders include mortgage banks and portfolio lenders.

Direct lenders can walk you through the mortgage process without intermediaries, like mortgage brokers, getting involved. They underwrite, process and close your loan on their own. Direct lenders raise capital from investors to make leveraged loans directly to borrowers in deals sourced by the direct lenders themselves.

You'll use the same process to apply to a direct lender as you will a mortgage broker – you'll fulfill credit score and down payment requirements and fill out an application. Next, through the underwriting process, an underwriter will check to see whether you qualify for the loan based on all of the information you provided.

These types of lenders work best if you want to get the process done quickly.

Wholesale Lenders

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

You, the borrower, would never come in contact with the wholesale lender. You would only work with the bank, credit union or mortgage broker throughout the application process. The underwriting process stays in-house with the third-party and wholesale lenders matching borrowers with the appropriate loan based on their qualifications.

Wholesale lenders usually sell their loans on the secondary market shortly after closing, which means that they sell their loans through 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 transaction. Credit unions, mortgage bankers and banks fit the description of retail lenders. They sell multiple products and handle loans in-house.

Since retail lenders include banks, credit unions and mortgage bankers, you'll have to fulfill the same set of requirements to get a loan as those listed above, though you should follow the individual institution's requirements. 

You may want to get 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 own money to originate mortgages. A community bank is a good example of a portfolio lender.

Portfolio loans are nonconforming and not sold on the secondary market. In other words, a portfolio lender holds loans in its own portfolio instead of selling them to Fannie Mae and Freddie Mac. Because it holds its own loans, a portfolio lender offers more flexible lending standards than conventional banks.

Borrowers who don’t meet Fannie and Freddie guidelines may want to look into working with a portfolio lender. For example, if you need a much larger loan like a jumbo loan, which exceeds the limits set by the Federal Housing Finance Agency, you may want to choose a portfolio lender.

Another example: A portfolio lender may choose to work with a client who has had a good relationship with the lender but who may not have a perfect credit score.

Due to their nature as a higher-risk loan, portfolio loans often require higher interest rates, closing costs and fees.

Online Lenders

Online lenders offer an alternative to a traditional bank. An online mortgage lender originates loans either entirely online with a completely digital experience or operates through a brick-and-mortar institution that has in-person locations.

Online lenders usually operate without having to pay overhead costs. Those savings get transferred to customers through lower interest rates and fees, enabling you to save thousands of dollars over the life of your loan.

You'll still fulfill the same set of requirements to get a loan – filling out an application and furnishing identification, evidence of income, a down payment and other requirements. You'll also have to prove your creditworthiness.

You can tap into the same advantages as you would with a regular bank, but you may realize some other perks as well, including access to lower rates and fees, fewer forms to fill out and a speedy overall process.

Correspondent Lenders

Correspondent lenders originate, underwrite, and fund mortgage loans using their own name. They then sell a loan to a larger mortgage lender, which services the loan by handling the mortgage payments and more. This second, larger lender may then sell the loan on the secondary market, such as to Freddie Mac or Fannie Mae.

As a borrower, here's how working with a correspondent lender would play out: You'd need to fill out an application to work with a correspondent lender. Once approved, the correspondent lender funds the mortgage using a separate line of credit. After closing, another entity buys it. The correspondent lender uses the money from that sale to pay off the line of credit. From then on, you make your monthly mortgage payments to that second entity.

You may experience a faster turnaround with a correspondent lender because they handle their underwriting and loan approval in-house. You may also get exposed to more mortgage options through correspondent lending because of their work with a wide variety of mortgage investors.

However, they have specific policies you need to adhere to and may charge extra fees. Check the exact application process with correspondent lenders and find out what products you can tap into before you go that route.

Great news! Rates are still low in 2021.

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How To Choose The Right Mortgage Lender

You want to choose a mortgage lender that will provide the best kind of service for your specific needs and goals. For example, first-time home buyers might want great customer service so the lender can answer in-depth questions. If you want to refinance, you need to find a lender that offers those services. You may want to look into a lender that offers government-backed loans if you're a veteran or service member or if you have bad credit.

Asking the right questions based on your situation can help you make the best decisions and get the best mortgage possible.

The Bottom Line

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

This might seem like a whole lot of choices, but the most important thing you can do is to choose a mortgage lender that offers the best service, depending on your own unique needs. Do your own due diligence and research to uncover the right type of mortgage lender for you.

Check out the Rocket Mortgage® article on more mortgage terms you should familiarize yourself with once you've chosen your lender.

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Melissa Brock

The Rocket Mortgage Learning Center is dedicated to bringing you articles on home buying, loan types, mortgage basics and refinancing. We also offer calculators to determine home affordability, home equity, monthly mortgage payments and the benefit of refinancing. No matter where you are in the home buying and financing process, Rocket Mortgage has the articles and resources you can rely on.