If you’re financing your home purchase, choosing the right lender could streamline the process. But there are many types of mortgage lenders: retail lenders, direct lenders, online lenders, and others.
Although many steps of the mortgage process are consistent across lenders, there are key differences that could affect the all-in cost. To help narrow your search, this guide will cover what mortgage lenders do and explore common mortgage lenders.
Key Points
• Mortgage lenders include direct, retail, wholesale, portfolio, warehouse, online, and hard money lenders, each with unique roles.
• Direct lenders manage the loan process internally, offering their own products.
• Mortgage brokers help borrowers find suitable home loans, managing paperwork and communication.
• Retail lenders issue mortgages directly to consumers, while wholesale lenders work through third parties.
• Hard money lenders focus on property value for loans, suitable for quick financing needs like property flipping.
Mortgage Lender, Defined
A mortgage lender is a bank, credit union, mortgage company, or individual that grants home loans to borrowers. Mortgage lenders evaluate an applicant’s creditworthiness and ability to repay the loan. Based on the buyer’s qualifications, the lender sets the interest rate and mortgage term.
After closing, the loan may be managed by a mortgage servicer. The mortgage servicer vs. lender difference is that the mortgage servicer is responsible for sending statements, collecting monthly payments, and allocating funds between the loan principal, interest, and escrow account, while the lender is loaning you money.
It’s possible that financial institutions act as both the mortgage lender and mortgage servicer.
Mortgage Lender vs. Mortgage Broker
Both lenders and mortgage brokers can assist with the purchase of a home. But there are key differences to understand when comparing a mortgage broker vs. direct lender.
Mortgage brokers do not originate or approve loans; rather, they help borrowers find a home loan that best fits their financial situation. They often have connections with many lenders and find solutions for less-qualified borrowers. A mortgage broker also helps organize required paperwork and manages communication between the borrower and lender.
A mortgage broker earns a commission for these services from either the borrower or lender after the loan closes. Licensing is required to be a mortgage broker, and the Nationwide Mortgage Licensing System & Registry maintains a database of licensed professionals by state. Search for NMLS consumer access.
You can always obtain loan quotes from at least one broker and one direct lender when you shop for a mortgage.
Online Mortgage Lender vs. Bank
Borrowers can work with a bank or mortgage lender to fund their home purchase.
Banks can offer mortgages along with other financial products, including checking accounts and commercial loans. A borrower may receive benefits, like a lower rate and lower closing costs, when applying for a bank mortgage if they’re an existing customer. As larger financial institutions, banks tend to use a mortgage servicer for their mortgage loans after closing.
As larger financial institutions, banks tend to service their mortgage loans after closing.
On the other hand, banks may have stricter lending requirements than mortgage companies, thanks to federal regulation and compliance. Borrowers may also have fewer loan options to choose from with a bank, as a mortgage lender specializes in mortgage products.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Common Mortgage Lender Options
If you’re in the market for a home loan, there are several types of mortgage lenders and terms to become familiar with. Here are the most common.
Direct Lenders
Direct lenders like mortgage lenders, banks, credit unions, and portfolio lenders fund, originate, underwrite, process, and close the loans on their own. They work directly with buyers and refinancers; there is no broker involved.
They work directly with buyers and refinancers; there is no broker involved.
Retail Lenders
Banks, credit unions, and mortgage companies can also be categorized as retail lenders. Retail lenders issue mortgages directly to consumers.
Homebuyers may receive more personalized assistance from a mortgage loan originator to find a home loan that fits their situation. But because retail lenders handle loans in-house, they generally only offer their own loan products.
Besides mortgages, retail lenders provide other credit products, including savings accounts, personal loans, and credit cards.
Wholesale Lenders
Wholesale lenders offer home loans through third parties, such as retail lenders or mortgage brokers, instead of directly to consumers. They fund the mortgage and set the loan terms, while the third party facilitates the application process and communicates with the borrower. After closing, wholesale lenders typically sell their home loans on the secondary mortgage market.
Portfolio Lenders
A portfolio lender, such as a community bank, uses its own money to originate nonconforming mortgages — those that do not meet Fannie and Freddie standards for purchase, such as jumbo loans. A portfolio lender has more flexible lending standards than a conventional direct lender because it holds its own home loans in a portfolio. But portfolio loans may come with higher interest rates and closing costs.
Warehouse Lenders
Warehouse lending provides short-term funding to mortgage lenders to finance a home loan. The mortgage serves as collateral until the lender — often a small or midsize bank — repays the warehouse lender. With warehouse lending, the mortgage lender is responsible for the loan application and approval process. After closing, the mortgage lender sells the loan on the secondary market and uses the proceeds to repay the wholesale lender. Mortgage lenders profit from this practice through origination fees and mortgage points.
A mortgage financed through a warehouse lender may provide faster funding and more flexibility than a conventional loan. For instance, borrowers could apply for construction financing with warehouse lending.
Online Lenders
With an online lender, the mortgage application process, processing, underwriting, and closing can all be completed virtually. Opting for a digital borrowing experience can get you to the closing table faster. No overhead means online lenders can offer lower rates and fees. On the other hand, borrowers may find it more difficult to build a working relationship with a loan officer when completing the process online.
Recommended: Prequalification vs. Preapproval: What’s the Difference?
Hard Money Lenders
Hard money lenders — individuals or private companies — offer hard money personal loans based on the value of the property rather than the borrower’s creditworthiness. The property serves as collateral, and borrowers must repay the loan in just a few years.
While hard money lenders can offer faster financing, these loans usually come with higher down payment requirements and interest rates because of their risk. Borrowers may benefit from a hard money lender if they plan to flip a property.
How to Find the Right Mortgage Lender for You
While there’s no shortage of lenders, finding the right mortgage lender takes some shopping around.
When browsing options, it’s useful to consider your financial situation and needs. For instance, can you afford a down payment on your own or with help from a family member or friend? Is your credit score high enough to buy a house?
Checking the fees and interest rate are important to determine how much you’ll have to pay upfront and over the life of the loan.
Applying to several lenders and/or working with a mortgage broker can let you compare rates and fees to negotiate better terms. Apply to all within a 14-day window to minimize damage to your credit score.
There are first-time homebuyer programs, too. The definition of first-time homebuyer is broader than it seems. It includes anyone who has not owned a principal residence in the past three years.
Recommended: Mortgage Loan Help Center
The Takeaway
There are many types of mortgage lenders to choose from. Your financial situation and goals will help you pick the mortgage lender that offers terms that fit your budget.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What does a mortgage lender do?
A mortgage lender offers home loans to borrowers with the expectation that the loans will be repaid with interest. They set the loan terms, including the interest rate and repayment schedule.
Are mortgage underwriters the same as the lender?
Underwriters assess a borrower’s income, assets, and debt to determine whether they are approved for a mortgage. Most lenders manage the underwriting process in-house.
Photo credit: iStock/luismmolina
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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