What Are the Main Types of Mortgage Lenders?

Reviewed by Pamela RodriguezFact checked by Betsy PetrickReviewed by Pamela RodriguezFact checked by Betsy Petrick

The main types of mortgage lenders are banks, credit unions, and online banks, but there are many more types of mortgage lenders. Rates and terms can vary significantly by individual lender. Shopping for a mortgage loan can feel confusing and a little intimidating. Understanding the differences between these main types of mortgage lenders can help you narrow your choices to find the best fit for you.

Key Takeaways

• Different types of mortgage lenders include banks, credit unions, and online banks.
• Each mortgage lender will have its own terms, interest rates, and fees.
• Consider the advantages and disadvantages of each mortgage lender to determine the right fit for you.
• The right type of mortgage lender for you will depend in part on your personal circumstances.

What Is a Mortgage Lender?

A mortgage lender is a bank, credit union, or other financial institution that provides financing for home purchases and refinances. Sometimes, they may also offer second mortgages, such as home equity loans or home equity lines of credit. 

Mortgage 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, and these factors can vary from lender to lender.

Types of Mortgage Lenders

There are several different types of mortgage lenders. Understanding how they work and their pros and cons can help you better evaluate your options and choose the right type of mortgage lender for you.

Mortgage Brokers

Mortgage brokers work with a host of different lenders to help you find a loan. You may consider a mortgage broker if you want assistance shopping around for a loan, but you’ll still want to do your own research to ensure you’re getting the best deal possible. 

Mortgage Bankers

Mortgage bankers borrow money at short-term rates from warehouse lenders to fund the mortgages they issue to consumers.

Shortly after a loan closes, the mortgage banker may sell it on the secondary market to Fannie Mae or Freddie Mac or to private investors to repay the short-term note. Most mortgage lenders in the U.S., including retail and direct lenders, are mortgage bankers.

Retail Lenders

Retail lenders provide mortgages directly to consumers, not institutions. Retail lenders include banks, credit unions, and mortgage bankers. Consider a retail lender if you want to work with a lender that also offers other products, such as checking accounts, 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. But unlike retail lenders, direct lenders typically don’t offer other financial products and services. They specialize in home loans only. 

As a result, some direct lenders may have less stringent eligibility requirements, making them worth considering if you’re worried about qualifying for a loan.

Portfolio Lenders

A portfolio lender funds loans with its own money and, therefore, isn’t beholden to the demands and interests of outside investors. Portfolio lenders set their own borrowing guidelines and terms, which may appeal to borrowers who are looking for something outside of what traditional lenders offer. 

For example, someone who needs a jumbo loan or is buying an investment property might find more flexibility in working with a portfolio lender. 

Wholesale Lenders

Wholesale lenders are 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. Many mortgage banks operate both retail and wholesale divisions. 

You may consider a wholesale lender if there aren’t many retail lenders in your area, or if you want more flexible requirements.

Correspondent Lenders

A correspondent lender is a lender that originates and funds a mortgage loan and then sells it to investors, such as Fannie Mae and Freddie Mac or a government agency. That said, the correspondent lender may continue to service your loan.

Most mortgage lenders are correspondent lenders. 

Warehouse Lenders

Warehouse lenders help mortgage bankers 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 wholesale lenders, warehouse lenders don’t interact directly with consumers, so it’s not an option you can choose. 

Hard Money Lenders

Hard money lenders are often the last resort if you can’t qualify with a portfolio lender or if you renovate homes to resell quickly. These lenders are usually private companies or individuals with significant cash reserves. Hard money loans generally 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, and they require a substantial down payment.

How to Choose the Right Mortgage Lender for You

With so many options, it’s important for you to take time to understand your financial situation, needs, and objectives, and to research all of your options. In particular, here are some factors to consider.

• Loan options: Learn about the different types of mortgage loans to determine which one is right for you. Then, focus on lenders that offer the loan program you’re considering.
• Eligibility requirements: Look at your credit score, income, and other eligibility factors that could impact your ability to get approved. If you’re having a hard time getting approved with a retail or direct lender, you may consider a portfolio lender or even a hard money lender. 
• Rates and terms: Once you’ve decided on a type of mortgage lender, shop around and compare interest rates, closing costs, and repayment terms to determine which lender offers the best deal.
• Convenience: If your bank or credit union offers mortgage loans, it could be worth it to keep all of your finances under one proverbial roof. However, consider this only if the loan terms and costs are competitive.
• Reputation: Research online reviews of each lender you’re considering to get an idea of what your experience might look like.  

Warning

While some lenders may offer less stringent requirements, it’s important to carefully consider the costs associated with those loans. In some cases, it may make sense to work on improving your creditworthiness instead of choosing an expensive loan.

Frequently Asked Questions (FAQs)

What Are the Three Main Types of Mortgages?

Some of the main types of mortgage loans include conventional loans, government-backed loans, and jumbo loans.

• Conventional loans: These are loans that aren’t backed by a government agency.
• Government-backed loans: These loans are offered through government programs. Examples include Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and VA loans (backed by the U.S. Department of Veterans Affairs).
• Jumbo loans: Jumbo mortgages are larger than the conforming loan limits set for conventional or government-backed loans.

What Are the Types of Lenders?

There are several different types of mortgage lenders, including:

• Mortgage brokers
• Mortgage bankers
• Retail lenders
• Direct lenders
• Portfolio lenders
• Wholesale lenders
• Correspondent lenders
• Warehouse lenders
• Hard money lenders

What Is the Most Popular Type of Mortgage Loan?

Conventional loans are the most common type of mortgage loan, making up 73% of all originations in 2023, according to U.S. Census Bureau data.

What Is the Easiest Type of Mortgage to Get?

Among traditional loan options, government-backed loans tend to be easier to obtain than conventional loans. However, if you don’t qualify for a conventional loan, you may consider a loan with a portfolio lender or even a hard money lender. 

The Bottom Line

Finding the right lender and loan can feel daunting. Researching and educating yourself before you start the process will give you more confidence to approach lenders and brokers. 

You might have to go through the pre-approval process with a few lenders to compare mortgage rates, terms, and products. Have your documentation organized and be frank about any challenges you have with credit, income, or savings so lenders and brokers offer you products that are the best match.

Read the original article on Investopedia.