Types of mortgage lenders and how to choose one

Navigating the mortgage landscape can feel overwhelming when you're preparing to buy a home. With so many different types of lenders to choose from, from traditional banks to online direct lenders, it's important to understand how each operates and who they typically serve.

This guide breaks down the key differences between lender types, helping you identify which option aligns best with your financial situation and needs.

Key takeaways:

• There are many types of mortgage lenders: Home buyers can work with banks, credit unions, mortgage brokers, online lenders, and specialty lenders, each offering different loan options and experiences.
• Lenders operate in different ways: Some lenders work directly with borrowers, while others operate through brokers or sell loans to investors, which can affect how the loan is funded, serviced, and priced.
• The right lender depends on your needs: Comparing loan options, rates, fees, and customer experience can help you choose a lender that fits your financial situation and home‑buying goals.

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 into a contract with a lender, they will evaluate your creditworthiness, income, and financial history. Based on that information, they will establish the terms of your loan, including your interest rate, the required down payment, and your repayment schedule. Your mortgage rate will also be determined by market conditions and economic factors.

Before you choose the lender to work with, be sure to ask your lender all the questions you have so that you fully understand the terms of your loan.

Mortgage lender vs. mortgage broker vs. mortgage servicer

When discussing home loans, there’s plenty of industry terminology that can get confusing. Here’s how to understand the difference between a mortgage lender, mortgage broker, and mortgage servicer:

• What a mortgage lender does: A lender is the institution that underwrites your application and uses its own funds to close the loan.
• What a mortgage broker does: A mortgage broker is an independent professional who does not lend their own money. Instead, they act as a matchmaker between borrowers and lenders. They’ll take your financial profile and shop it around to various wholesale lenders to find you a competitive rate and term.
• What a mortgage servicer does: A servicer is the company that manages your loan after it closes. They collect your monthly payments, manage your escrow account for taxes and insurance, and assist you if you fall behind on payments. Your lender and your servicer can be the same company, but many lenders sell the servicing rights to third-party companies after closing.

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 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, from checking accounts and credit cards to auto loans and 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 fund 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. Using your existing bank can sometimes yield relationship discounts or fee waivers on your mortgage.

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.

Because they are not-for-profit, credit unions can often offer more personalized service, lower interest rates, and reduced closing costs. However, you must meet specific membership criteria - such as living in a certain county or working in a specific industry - before you can apply for a loan.

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.

If your financial situation is complex, a broker can be a helpful resource. For example, if you are a freelance worker or have a lower credit score, an experienced broker can help you find a lender with the best terms.

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.

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.

Private lenders

Private lenders are individuals or non-institutional investment groups that offer home loans directly to buyers, often known as a private mortgage. Because they are not bound by the strict conforming regulations of federal agencies, private lenders can offer flexible qualification requirements. However, these loans almost always come with significantly higher interest rates and shorter repayment terms, making them more common for real estate investors rather than traditional home buyers.

Types of mortgage lenders by business model

There are many different types of lenders in the primary mortgage 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 originates and funds its own mortgages to borrowers with its own funds and without the help of an intermediary like a mortgage broker. Direct lenders handle the entire process internally, from application and processing to underwriting and closing.

The lender may then also service the loan, though that’s not always the case. Both banks and credit unions can be direct lenders. Because there are no middlemen involved, direct lenders can often conduct underwriting and close loans faster than other institutions.

Retail lenders

Retail lending is a broad term that spans all loans and credit that banks offer to individual consumers instead of businesses. In the case of mortgages, retail lenders offer personal mortgages to help people buy their homes. Retail lenders include traditional banks, credit unions, and direct online lenders. When you apply through a retail lender, you are working directly with the entity that will fund your loan and walk you through the closing process.

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 third-party brokers and other financial institutions, who market and sell these loans to borrowers.

The broker handles the customer-facing interactions, taking your application and guiding you, while the wholesale lender handles the underwriting and provides the actual funds at the closing table.

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

Portfolio lenders

A portfolio lender is one that originates loans and then keeps them in their own investment portfolios rather than selling them. Most standard lenders sell the loans they originate on the secondary mortgage market to free up capital. But a portfolio lender originates loans and keeps them on its own balance sheet for the life of the loan.

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.

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 having a 30- or 15-year loan term, 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.

Mortgage bankers

Mortgage bankers are individuals or companies that use their own funds or warehouse lines of credit to originate and close home loans. While the term is often used interchangeably with direct lender, it highlights the fact that the company is specifically focused on banking related to real estate, as opposed to a traditional bank that also handles checking accounts and auto loans.

Non-QM and specialty lenders

Non-QM (Non-Qualified Mortgage) lenders provide loans that do not meet the strict consumer protection standards established by the Consumer Financial Protection Bureau (CFPB) for standard, qualified loans. These lenders cater to borrowers with unique income streams, such as self-employed entrepreneurs who qualify using bank statements rather than W-2s.

Reverse mortgage lenders

Reverse mortgage lenders specialize in loans designed for homeowners who are 62 or older who want to convert their equity into income. Rather than making monthly payments to the lender, the borrower receives payments, and the loan balance increases over time. The loan is eventually repaid when the borrower sells the home, moves out permanently, or passes away.

Bank vs. non-bank mortgage lenders

It can also help to understand the difference between banks vs. non-bank mortgage lenders.

Banks

Traditional deposit banks, such as large national brands or your local community bank, offer mortgages alongside their everyday banking services. They are heavily regulated federal institutions that manage consumer deposits. Because they have strict federal oversight and a wide array of products, they typically adhere to stricter underwriting standards.

Non-bank mortgage lenders

Non-bank mortgage lenders are dedicated financial institutions that only offer home loans. They do not accept consumer deposits or offer checking accounts. In recent years, non-banks have dominated the market, accounting for a massive share of all residential mortgage originations due to their specialized focus, technological agility, and ability to quickly adapt to the needs of home buyers.

Pros and cons to compare

To decide which option fits your style, consider the tradeoffs:

• Banks:
  • Pros: You may be able to get discounts if you already have an existing account with that bank. There’s also the convenience of keeping all your finances under one roof.
  • Cons: The mortgage application process can sometimes be slower. Banks may also have stricter credit and down payment requirements.
• Non-bank mortgage lenders
  • Pros: Because mortgages are their sole focus, the process is usually highly streamlined, faster, and powered by user-friendly digital platforms. They also often offer more flexible qualifying criteria and a wider variety of government-backed loan options.
  • Cons: You cannot bundle your mortgage with other banking products like checking or savings accounts, and they generally do not offer in-person branch visits for everyday banking needs.

Mortgage loan types to compare before choosing a lender

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.

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:

Start with the loan type that fits your situation

If you meet the qualification requirements for a conventional loan, they typically cost less than an FHA loan. However, FHA loans tend to be cheaper if you have a lower credit score and a smaller down payment. VA loans are only available to eligible servicemembers, veterans, and their surviving spouses, but they don’t require a down payment or mortgage insurance. USDA loans do not require a down payment either but are only available to low- and moderate-income borrowers in certain rural areas.

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.

Compare fees and closing costs

A low interest rate is only a good deal if it is not offset by exorbitant fees. Look closely at origination fees, application fees, underwriting fees, and whether the lender is charging you for mortgage points to artificially buy down the rate. Comparing the Annual Percentage Rate (APR) across lenders gives you the most accurate picture of the total cost.

Get at least three Loan Estimates

To make a fully informed decision, it is strongly recommended that borrowers request official Loan Estimates from at least three different lenders. Every lender must use the same standardized Loan Estimate form to make it easy for you to compare terms. Be sure to check if your interest rate is locked and check for risky features like a balloon payment.

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

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.