If you’re in the market for a new home or want to refinance your current mortgage, it’s time to find a mortgage lender. But before you finalize a contract, it's important to shop around and understand how the different types of mortgage lenders could affect your bottom line.
9 Types of Mortgage Lenders
- Retail Lender
- Direct Lender
- Wholesale Lender
- Warehouse Lender
- Online Lender
- Hard Money Lender
- Portfolio Lender
- Correspondent Lender
- Credit Union
When it’s time to find the best mortgage lender, it helps to start by doing research. It’s good to shop around and compare the rates and repayment schedules of different lenders. You may be thinking that all lenders are the same, offering the same types of loans. However, that is most certainly not true. Different lenders offer different types of loans.
1. Retail Lender
A retail lender offers mortgages directly to consumers. This includes banks, credit unions, and mortgage bankers. When you think of your local bank or credit union, you’re thinking of a retail lender. These retail lenders typically offer other financial products like checking accounts, savings accounts, investment accounts, and auto loans.
If you are a veteran in search of a VA loan, or live in a qualifying rural area and have the qualifying income for a USDA loan, you might think that the loan program you need is offered by one of these institutions as the mortgage loan originator. While some of these loans are still originated by the likes of the VA and USDA, the vast majority are offered by retail lenders like a bank. The VA and USDA just guarantee the loan (or a portion of it) so that these lenders can accept the greater credit risk of offering more favorable terms to the borrower. Lenders often limit their credit risk by charging more interest or requiring the borrower to get private mortgage insurance.
2. Direct Lender
A direct lender originates their own loan products. They may finance the loan themselves, or borrow it in turn from another lender. Many retail lenders are also direct lenders, but not all of them.
Some banks do originate and fund the loan themselves, often drawing from cash deposits made by customers with checking accounts. There is a good chance that if you are obtaining a conventional loan from a large national bank, the bank may be generating the loan itself. If your bank is a smaller local bank, however, they may be getting that mortgage from a different lender (who you will never meet) and presenting it to you as the customer. The impact that this has on your interest rate and loan terms does not mean that a direct lender is better than a retail lender who is merely servicing the loan.
3. Wholesale Lender
A wholesale lender provides mortgages and loans to other lenders, who then deal with a customer. The wholesale lender does not have direct contact with the homeowner.
Think of wholesale versus retail when it comes to shopping for groceries. Generic products may be sold to a wide range of stores that repackage them with their own label. This is what retail lenders are doing when they obtain a loan from a wholesale lender and then sell it to consumers.
4. Warehouse Lender
A warehouse lender is similar to a wholesale lender in that both help retail lenders offer mortgages to consumers. However, while the wholesale lenders actually provide the loan that is repackaged by the bank or credit union, a warehouse lender gives a financial institution a loan so that they in turn can originate their own loan to sell to customers.
This distinction is somewhat of a fine point that might be ultimately less relevant than the fixed-rate mortgage or adjustable-rate mortgage facing the consumer. These considerations are something you will need to research, whether you’ve shopped for a mortgage before or are learning how to get a mortgage loan for the first time.
5. Online Lender
Online lenders are a recent phenomenon. In times past, borrowers would have to go into a branch of their bank to apply for a loan in person. Today, there are financial services companies like Quicken and Rocket Mortgage that let potential lenders apply for a mortgage online. Some consumers prefer these lenders because the waiting time between applying for a mortgage and the closing is far shorter than that of a traditional brick and mortar bank.
These online lenders are often not generating the loans themselves. For example, although Quicken Loans are presented to customers as originating with Quicken, they are likely from a different lender and repackaged for consumer-facing engagement.
An online lender can become a viable banking relationship, providing a homeowner who has home equity with a home equity loan, also called a HELOC (home equity line of credit). Online banking and lending today has become very competitive, so you may be able to find a great mortgage rate and mortgage payment schedule right from your smartphone.
6. Hard Money Lender
A hard money lender is typically an enterprising individual in the real estate investment space. Hard money loans are often much easier to get than other types of mortgage loans. This is because the lender tends to care more about the collateral than the creditworthiness of the borrower.
If the loan goes into default, they are fine taking the property in question, since they might also be involved in investing in real estate. Hard money loans do tend to have much higher interest rates, however, partially to mitigate the lending risk. For these reasons, hard money loans are generally something a homeowner should stay away from. A mortgage company or mortgage broker will usually guide you toward another type of loan.
7. Portfolio Lender
Portfolio lenders originate mortgages and then service and keep the debt in a portfolio. These lenders originate and service the loans themselves. They do not resell the loans to other lenders.
Portfolio loans can be easier to get or more sizable (like a jumbo mortgage) because they often don’t need to meet conforming loan limits and don’t require private mortgage insurance. Conforming loan limits refer to how big the loan can get before it can no longer be guaranteed by federal agencies like Fannie Mae and Freddie Mac. Private mortgage insurance is essentially a type of insurance the borrower has to pay for, which projects the lender in case of a default.
8. Correspondent Lender
A correspondent lender originates a mortgage and then sells it to another financial institution to service it. This loan servicer will be responsible for collecting the payments and dealing with any issues that come up in the life of the loan, such as default.
These types of mortgage lenders will often sell the mortgage on a secondary market as well. The customer making their monthly payment will likely never see or understand behind the scenes of their home loan, so these details may ultimately be irrelevant. Of greater concern is how the party offering this loan option packages the loan for consumers in terms of interest rates, payment schedule, and the underwriting process.
9. Credit Union
A credit union initially seems similar to a bank, but the key difference is that while banks are for-profit businesses, credit unions are non-profit businesses. Non-profit businesses are still allowed to make money, but they must put those profits into the organization. Because of their non-profit nature, credit unions often offer lower fees and interest rates than their bank counterparts.
A credit union offering a mortgage may be an appealing alternative to a retail financial institution. While shopping around for the best mortgage lender, you might be discouraged by reading that some credit unions charge membership fees. These fees are usually extremely nominal. The credit union might also become a resource for future financing in other areas of life, for instance, if you need a credit card or personal loan.
Which Lenders Offer a Reverse Mortgage?
A reverse mortgage may be offered through a mortgage bank or a retail lender. A reverse mortgage is more similar to a HELOC than a mortgage. The borrower gets a cash sum (lump or tied to a credit line) that is either wholly or partially equivalent to the amount of equity they have in their home. This money is often used by retirees who have paid their homes off in full. There is no timetable for repayment, and sometimes with the death of the borrower the property is sold to satisfy the loan, or the beneficiaries may resume making the monthly payment.
Mortgage Lender vs Mortgage Broker
What’s the difference between a mortgage lender and a mortgage broker?
It’s important to distinguish a mortgage lender from a mortgage broker since the two are often confused. A mortgage lender is the financial institution (or sometimes individual) providing a mortgage loan for your home. A mortgage broker is someone who helps you shop around with different lenders and finds you the best mortgage. It’s similar to the way a real estate agent might work with you to help you find your optimal home and negotiate the best deal with the seller. The fiduciary duty of a mortgage broker is to assist you in getting a mortgage loan that best meets your interest.
The most well-known among mortgage lenders are commercial institutions like banks, where you might keep a checking account. But there are several other types of lenders, some of which specialize in working with specific types of borrowers.
How To Choose the Right Mortgage Lender
Some types of mortgage lenders are better than others for consumers in the home buying or home refinancing market. Some lenders, like a hard money lender, you may be better off avoiding. A hard money loan with a high interest rate is better for a real estate investor who flips houses. These types of borrowers are planning to unload the property within a few months, and so the punitive interest rate will only be hitting them for a short time.
By contrast, a consumer with their own primary residence is going to want a loan with a lower interest rate that is sustainable in the long term. Other types of mortgage lenders are ones that consumers will probably never interact with anyway, such as wholesale and warehouse mortgage lenders.
If you do get a loan from a direct lender or a retail lender without working with a mortgage broker, you will still work with a loan officer. This person will be your point of contact during the mortgage application process. Your loan officer should get to know you and your financial goals, such as whether your home is a shorter term or longer term investment, and be available to answer questions at a reasonable hour via phone or email.
For most homeowners and first-time homebuyers, we recommend researching retail lenders. The easiest way for current or future homeowners to get the loan they need is through retail banks, credit unions, or a mortgage broker who might be able to secure a more favorable method of funding.
