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 accessible to you. 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.

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 that a prospective buyer will work with.

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 to get a mortgage with a specific credit union.

Credit unions can offer standard mortgage products, including fixed-rate mortgages and adjustable-rate mortgages (ARMs). They also may offer government-backed mortgages, such as the Federal Housing Administration’s FHA loans, the Veterans Administration’s VA loans and the U.S. Department of Agriculture’s USDA loans. They also offer. Often you can get a mortgage to buy a home and also choose refinancing through a credit union.

Credit unions may 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.

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.

Sometimes banks may  keep your loan in their portfolio and service it. More likely they will choose to sell it on the secondary market or sell the servicing rights to another party. Mortgage bankers 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.

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

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 direct 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 could work with 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.

Warehouse Lenders

Warehouse lenders offer loans in the form of short-term funding. Once these loans are sold on the secondary market, warehouse lenders are repaid their line of credit. These lenders do not interact with the customers directly and the mortgages are used as collateral until mortgage banks or correspondent lenders repay the loan.

Hard Money Lenders

Hard money lenders are often used for borrowers who renovate homes to resell quickly or for those who may not be able to qualify with a portfolio lender. With hard money loans, the home is used as collateral when financing the loan and needs to be repaid within a few years. Because of this, if the borrower defaults, the lender will take possession of the property.

Typically hard money lenders are privately funded companies or wealthy individuals. These lenders typically charge a substantial origination fee to obtain a loan and require larger down payments. Their loans often come with higher interest rates than loans from conventional lenders.

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 a  lender that can answer in-depth questions and explain all mortgage options. 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.

You can choose from many different types of mortgage lenders, including credit unions, mortgage bankers and mortgage brokers. 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.