What is a mortgage lender?
A mortgage lender provides financing related to real estate, whether buying a property, constructing one, or fixing one up. Some lenders, like banks, offer other types of loans and services, while others deal exclusively in home loans.
When you apply for a mortgage, the lender assesses your ability to repay it based on your credit and financial picture. The lender then determines whether you’re qualified to borrow the funds and, if so, how much and at what interest rate.
Types of Mortgage Lenders
There are various types of mortgage lenders, from local and regional lenders to brand-name financial institutions. Here’s an overview:
Retail lenders
When you picture a mortgage lender, you’re probably thinking of a retail lender. Credit unions and banks fall under this category. They’re called retail lenders because, like retail stores, they deal directly with consumers. These lenders almost always adhere to the mortgage qualifying standards laid out by the government — more on that here — such as a minimum credit score and maximum debt-to-income (DTI) ratio. This is so the lender can sell your mortgage to investors, thereby bringing in more capital to make more loans.
Direct lenders
Direct lenders function a lot like retail lenders, except that while the latter might offer a variety of other products, a direct lender specializes in mortgages.
Portfolio lenders
Portfolio lenders offer mortgages that they retain in their portfolio, rather than sell to investors. As a result, they aren’t subject to much of the underwriting criteria that guide direct or retail lenders.
Wholesale lenders
If you get a home loan through a mortgage broker, a wholesale lender is likely behind it. These lenders offer the loans they originate through third-party brokers who interface with borrowers; they don’t deal with consumers directly. After closing, many wholesale lenders sell the mortgage to investors and let a different financial institution service the loan.
Online lenders
Some mortgage lenders only operate online. You might apply for the loan using an online form rather than by meeting with a loan officer, for example. Because they have less overhead, these digital enterprises might be able to offer lower rates and fewer fees.
Warehouse lenders
Just like a wholesale lender, warehouse lenders don’t interact with consumers. Instead, they offer the funding other borrower-facing institutions need to originate the loan. Warehouse lenders typically offer this financing within a tight timeline, with the expectation that the loan will be sold right after closing, at which point the lender gets repaid.
Correspondent lenders
Correspondent lenders originate their own loans, but not with the goal of servicing them. Instead, they generally work with larger lenders who buy the loan after closing. That assumes, of course, that they can sell the loan. If they can’t, the correspondent lender will be the one to service your loan.
Hard money lenders
Hard money lenders can usually close quickly with fairly flexible underwriting criteria, but they come with two big downsides. First, you might need to pay a hefty origination fee. Second, hard money loans generally need to be repaid quickly. They can be an appealing option for a house-flipper but generally aren’t the go-to option for your average borrower.
How to choose the right mortgage lender for you
The best way to find the right mortgage lender is to compare offers. Consider the following:
APR and interest rate – The lower the interest rate, the less you’ll have to pay over time. The interest rate is just one piece of the annual percentage rate, or APR, however. The APR also includes the lender’s fees, points, and other costs. Compare both of these figures to get a sense of which lender might be more affordable.
Convenience – When you have questions or need help, how easy is it to get in touch with the lender? Do you need to be able to visit a branch? Do you have access to an online portal to set up auto-payments or view statements? Can you make payments over the phone or through an app? Consider what’s important to you in terms of access to your lender.
Reputation – Some lenders are renowned for customer service, while others have garnered complaints. Check out third-party reviews and testimonials to see what past customers have to say.
Source: Vita, Suzanne De. “What Are Mortgage Lenders?” Bankrate, 5 Jan. 2024, www.bankrate.com/mortgages/what-are-mortgage-lenders/.
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