Shopping for a mortgage lender can feel confusing and a little intimidating. With so many companies and types of mortgage lenders to choose from, you might feel analysis paralysis. Understanding the differences among the main types of lenders can help you narrow down the field.
The type of loan you choose is obviously important, but choosing the right mortgage lender could save you money, time and frustration. That’s why taking the time to shop around is crucial. It’s a crowded field, too. There are retail lenders, direct lenders, mortgage brokers, correspondent lenders, wholesale lenders and others – and some of these categories can overlap.
Let’s take a closer look at each type of lender.
Mortgage Lenders vs. Mortgage Brokers
You’ve probably seen these two terms in your home-buying research, but they have different meanings and functions. A mortgage lender is a financial institution or mortgage bank that offers and underwrites home loans. Lenders have specific borrowing guidelines to verify your creditworthiness and ability to repay a loan. They set the terms, interest rate, repayment schedule and other key aspects of your mortgage.
A mortgage broker, however, works as an intermediary between you and lenders. In other words, mortgage brokers don’t control the borrowing guidelines, timeline or final loan approval. Brokers are licensed professionals who collect your mortgage application and qualifying documentation, and can counsel you on items to address in your credit report and with your finances to strengthen your approval chances. Many mortgage brokers work for an independent mortgage company so they can shop multiple lenders on your behalf, helping you find the best possible rate and deal. Mortgage brokers are typically paid by the lender after a loan closes; sometimes the borrower pays the broker’s commission upfront at closing.
Types of Mortgage Lenders
Mortgage Bankers – Most mortgage lenders in the U.S. are mortgage bankers. A mortgage bank could be a retail or a direct lender – including large banks, online mortgage lenders like Quicken, or credit unions. These lenders borrow money at short-term rates from warehouse lenders (see below) to fund the mortgages they issue to consumers. Shortly after a loan closes, the mortgage banker sells it on the secondary market to Fannie Mae or Freddie Mac, agencies that back most U.S. mortgages, or to other private investors, to repay the short-term note.
Retail Lenders – Retail lenders provide mortgages directly to consumers not institutions. Retail lenders include banks, credit unions and mortgage bankers. In addition to mortgages, retail lenders offer other products, such as checking and savings accounts, personal loans and auto loans.
Direct Lenders – Direct lenders originate their own loans. These lenders either use their own funds or borrow them from elsewhere. Mortgage banks and portfolio lenders can be direct lenders. What distinguishes a direct lender from a retail bank lender, however, is specialization in mortgages; retail lenders sell multiple products to consumers and tend to have more stringent underwriting rules. With a niche focus on home loans, direct lenders tend to have more flexible qualifying guidelines and alternatives for borrowers with complex loan files. Direct lenders, much like retail lenders, offer only their own products so you’d have to apply to multiple direct lenders to comparison shop. Many direct lenders operate online or have limited branch locations, a potential drawback if you prefer face-to-face interactions.
Portfolio Lenders – A portfolio lender funds borrowers’ loans with its own money. Accordingly, this type of lender isn’t beholden to the demands and interests of outside investors. Portfolio lenders set their own borrowing guidelines and terms, which may appeal to certain borrowers. For example, someone who needs a jumbo loan or is buying an investment property might find more flexibility working with a portfolio lender.
Wholesale Lenders – Wholesale lenders are banks or other financial institutions that offer loans through third parties, such as mortgage brokers, other banks or credit unions. Wholesale lenders don’t work directly with consumers, but originate, fund and sometimes service loans. The wholesale lender’s name (not the mortgage broker’s company) appears on loan documents because the wholesale lender sets the terms of your home loan. Many mortgage banks operate both retail and wholesale divisions. Wholesale lenders usually sell their loans on the secondary market shortly after closing.
Correspondent Lenders – Correspondent lenders come into the picture when your mortgage is issued. They are the initial lender that makes the loan and might even service it. Typically, though, correspondent lenders sell mortgages to investors (also called sponsors) who re-sell them to investors on the secondary mortgage market. The main investors: Fannie Mae and Freddie Mac. Correspondent lenders collect a fee from the loan when it closes, then immediately try to sell the loan to a sponsor to make money and eliminate the risk of default (when a borrower fails to repay). If a sponsor refuses to buy the loan, though, the correspondent lender must hold the loan or find another investor.
Warehouse Lenders – Warehouse lenders help other mortgage lenders fund their own loans by offering short-term funding. Warehouse lines of credit are usually repaid as soon as a loan is sold on the secondary market. Like correspondent lenders, warehouse lenders don’t interact with consumers. Warehouse lenders use the mortgages as collateral until their clients (smaller mortgage banks and correspondent lenders) repay the loan.
Hard Money Lenders – Hard money lenders are usually a last resort if you can’t qualify with a portfolio lender or if you fix-and-flip homes. These lenders are usually private companies or individuals with significant cash reserves. Hard money loans usually must be repaid in a few years so they appeal to fix-and-flip investors who buy, repair and quickly sell homes for profit. While hard money lenders tend to be flexible and close loans quickly, they charge hefty loan origination fees and interest rates as high as 10% to 20%, and require a substantial down payment. Hard money lenders also use the property as collateral to secure the loan. If the borrower defaults, the lender seizes the home.