What Are the Different Types of Mortgage Lenders?

What Is a Mortgage Lender?

A mortgage lender is a financial institution that provides financing for borrowers to purchase and refinance real estate. Lenders include banks, credit unions, online lenders and mortgage companies, and they offer various loan products based on a borrower's creditworthiness, income and financial history.

While some lenders service the loans they originate—meaning they handle payment processing and customer service—others sell the loans to investors or government-sponsored entities like Fannie Mae or Freddie Mac.

What Are the Types of Mortgage Lenders?

There are many different types of mortgage lenders, and depending on your situation, one may be better suited for you than the others. Here's what to know about how each one works.

Direct Lenders

Direct lenders originate their own loans using their own funds or capital borrowed from investors. Banks and credit unions fall into this category, as do companies that specialize in offering mortgages, such as Rocket Mortgage.

Direct lenders that specialize in home loans often can offer more home loan options, faster funding and more relaxed eligibility criteria. However, they don't usually offer other financial products and services.

Retail Lenders

Retail lenders work directly with borrowers to offer mortgage loans. But unlike some direct lenders, retail lenders also offer other financial products and services, such as bank accounts, credit cards and other loan options. Banks, credit unions and mortgage bankers also fit this category.

Retail lenders may offer a variety of home loan programs, but the selection may not be as wide compared to direct lenders who specialize in mortgage lending. They may also have stricter eligibility requirements.

Online Lenders

As the name suggests, these lenders operate primarily online, though some may also have physical locations.

Because they have lower overhead costs, online lenders can often offer lower interest rates and fees. They may also provide faster funding times. However, they're less likely to offer a human touch, which some borrowers may prefer.

Portfolio Lenders

A portfolio lender originates mortgage loans using its own capital and keeps those loans on its books rather than selling them to investors.

As a result, portfolio lenders aren't subject to outside influence and can offer more flexible eligibility requirements and terms than other lenders. They may be especially worth considering if you need a non-conforming mortgage loan or financing for an investment property.

However, they tend to charge higher interest rates and fees and may also require higher down payments.

Learn more: What Is a Portfolio Mortgage?

Hard Money Lender

A hard money lender is a private company or individual that offers short-term mortgage loans to real estate investors. They're commonly used for fix-and-flip investments, where the buyer renovates the home for the purpose of reselling for a profit.

Unlike other mortgage loans, hard money financing is based on the value of the property rather than the borrower's creditworthiness. However, because these transactions tend to be risky, hard money lenders often charge higher interest rates and may require repayment within just a few years.

Wholesale Lenders

Wholesale lenders don't work directly with borrowers. Rather, they offer mortgage loans through other financial institutions, such as banks and credit unions. In some cases, a financial institution may have a wholesale division and a retail division.

Wholesale lenders may offer competitive interest rates and may be particularly beneficial if you live in an area with few lenders. However, you may end up paying more fees because two parties are involved in the transaction.

Warehouse Lenders

Warehouse lenders provide short-term financing to other mortgage lenders, allowing them to fund home loans before selling them on the secondary market.

These warehouse lines of credit are typically paid off quickly once the loan is sold. Unlike retail or direct lenders, warehouse lenders operate behind the scenes and don't work directly with consumers, so they're not a loan option borrowers can choose themselves.

Where to Find a Mortgage Lender

As you prepare for the mortgage process, it's a good idea to research and evaluate all of your options. Here are some ways you can find a mortgage lender:

• Banks and credit unions: Banks and credit unions may offer mortgage loans as retail lenders or portfolio lenders. They may also work with wholesale and warehouse lenders to offer financing. While banks typically offer more loan options, credit unions might offer lower interest rates and fees.
• Mortgage brokers: Mortgage brokers act as middlemen, helping you find and compare different lenders and loan options in exchange for a fee.
• Real estate agents: Some real estate agents may have preferred lenders they work with and recommend to their clients. That established relationship can help make the mortgage process go more smoothly, but you may choose another option if you can find a better deal elsewhere.
• Comparison sites: Some websites make it possible for you to compare personalized rates from multiple lenders at once, often in just a few minutes. These may include direct lenders that specialize in home loans. You'll enter some basic information about your preferred loan terms, location and credit score to get some estimates. While a comparison site can be a good starting point, it's important to note that you'll need to get preapproved with multiple lenders to get legitimate estimates.

Learn more: How to Shop for a Mortgage

How to Choose a Mortgage Lender

With so many different types of lenders and offers available, it can be difficult to know exactly how to pick the right one for you. Here are some things you can do as you shop around:

• Research reputation. Read online reviews of the lender to get a sense of overall customer satisfaction, as well as individual issues that may affect you as a customer.
• Compare interest rates. Lenders will offer different interest rates, potentially allowing you to negotiate better terms with the financial institution you ultimately choose.
• Check all fees. In addition to interest rates, you'll also want to compare the closing costs you'll incur with each lender. Like rates, closing costs may be negotiable.
• Inquire about turnaround times. If you want to close sooner rather than later, ask the lender about how long it typically takes to finalize the loan process. If timing isn't a major issue for you, however, this may not matter as much.
• Look for transparency. You'll want to work with a lender that maintains good communication throughout the loan process and answers any questions you have. If you're frustrated with a lender, it may be worth it to switch.

Build Credit Before Applying for a Mortgage Loan

If you're thinking about buying a home or refinancing your existing mortgage, it's critical that you take time to evaluate your credit long before you begin the process. You can get free access to your Experian credit report and FICO^® Score^☉ to get a feel for where you stand.

If your credit score needs some work, use your credit report to identify areas where you can take action. Some ways to improve your credit may include catching up on past-due payments and paying down credit card balances.

Whatever you do, be sure to track your progress and continue practicing other good credit habits to save on your home loan.