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If you want to finance the buying of a home or refinance your existing loan, you’ve got plenty of sources to choose from. Many different types of lenders offer mortgage purchase or refi loans, including popular fixed-rate 30-year loans and adjustable-rate mortgages (ARMs).
Before you begin shopping, take the time to learn more about the various lender options available, including direct mortgage lenders, mortgage bankers, correspondent lenders, and portfolio lenders.
Mortgage lenders defined
A mortgage lender provides the funds borrowers need to purchase or refinance a home. Lenders play a crucial role in the home-buying process by offering loans to individuals who would otherwise not be able to afford the transaction out of pocket.
These loans are granted based on the creditworthiness of the borrower, the value of the property being purchased, and other factors.
Fortunately, borrowers can explore several lender options when seeking financing. And your choices aren’t limited to big-name banks.
“A mortgage lender is an entity, often a bank, credit union, or specialized mortgage company, that lends money specifically for a real estate acquisition, including residential property,” explains Carl Holman with A&D Mortgage. “Understanding the various types of mortgage lenders is crucial because each type offers distinct terms, rates, and services as well as specific pros and cons. Having this knowledge can empower you to better compare options and select the lender that best suits your financial situation, property type, and personal preferences.”
Different types of mortgage lenders
Let’s take a closer look at the handful of lender options available to most home buyers and owners and examine the plusses, minuses, and best candidates for each.
Direct mortgage lenders
A direct mortgage lender is a financial institution that originates, processes, and funds mortgage loans directly to borrowers without intermediaries. They use their own money for the loans they offer. Here, everything from application to closing is done in-house to provide a streamlined process.
“They typically have a straightforward application process and often boast quicker loan approvals, but their rates and terms may not be as competitive as others,” says Holman.
Another advantage of a direct mortgage lender? “Your loan will often not be sold to another group, so you don’t have to worry about having your mortgage transferred elsewhere after you close,” says Karl Jacob, CEO/co-founder of LoanSnap. “The disadvantage is that direct mortgage lenders often have a finite amount of money to use to purchase loans, so they may not always have the best options for you.”
Banks that lend out mortgage loans
Many traditional banks, as well as credit unions, also offer mortgage loans along with other banking and financial services. Traditional banks are the most common sources of mortgage loans today.
“They follow a comprehensive approach, offering various loan types and in-person service, especially if you go to a brick-and-mortar bank in your neighborhood,” says Sal Ali, a mortgage broker and director of InstaMortgage. “These are familiar sources, so their reputation is established. And there is potential for loan discounts if you have or open a bank account. Banking customers seeking convenience and potential relationship discounts should request a loan quote from their existing bank.”
On the downside, a traditional bank may have more strict lending and underwriting criteria, longer processing times, and less flexibility.
Or, you could choose to do business with a mortgage banker. These are institutions or individuals who specialize in originating, underwriting, and funding mortgage loans.
They commonly sell their loans to investors after closing but may continue to service the loans. They can provide tailored services but may have limited product offerings compared to banks and other lenders.
“Mortgage bankers may work independently or as part of a financial institution, handling various aspects of the loan process. They can present a wide array of conforming as well as non-conforming loan products that meet secondary market standards, and they may offer more flexibility in underwriting,” adds Ali.
However, mortgage banker rates and fees can vary significantly, which is why it pays to shop around.
As with banks and mortgage brokers, correspondent lenders originate and fund loans in their name. Then, they sell them to larger lending or financial institutions for servicing.
“They combine the benefits of direct lenders and large banks, offering personalized service and a variety of loan products,” Holman points out.
On the plus side, you may be offered a larger array of loan products with a correspondent lender than you would with other lending sources. And with everything handled in-house, the path to closing is often quicker and more streamlined.
But be prepared to fork over more in fees for things like origination and appraisal. And the different lending standards correspondent lenders must meet are set by the investors who later purchase these loans, which means the borrower rules and requirements may be more strict.
A different take on a direct mortgage lender is a portfolio lender. These funding sources also originate, underwrite, and lend money from their own funds, but they don’t later sell their mortgage loans on the secondary market to another servicer.
Instead, they hold their loans in their portfolio as part of a fund.
“Portfolio lenders have the flexibility to set their own criteria, potentially catering to unconventional borrowers who may not qualify for loans from other sources,” Ali continues. “That means they can often provide more customized loan terms on conforming and non-conforming loan products.”
The biggest drawback to partnering with a portfolio lender is you’ll likely pay much higher interest rates. Plus, they may have more stringent criteria you’ll need to meet to offset their underwriting risks.
Hard money lenders
Alternatively, consider shopping for a loan from a hard money lender, if necessary.
“These are private individuals or companies that offer short-term, high-interest loans, often backed by real estate. They focus on the value of the collateral – in this context, the home – rather than the borrower’s creditworthiness and credit history,” says Ali.
Per Jacob, hard money lenders are more popular among those with poor credit or who are in a cash crunch and need money fast. They are often among the last resort options for mortgage borrowers who can’t get approved elsewhere.
But be forewarned: You’ll pay exorbitantly high rates with a hard money lender and will likely have to choose a loan with a much shorter repayment schedule.
» MORE: See today’s refinance rates
How to pick a mortgage lender
To find the right lender for you, it’s wise to shop around and request rate quotes from several different lending sources, including at least two lenders in most of the categories above.
Ali recommends asking each lender the following questions:
- What types of loan products do you offer that I may qualify for?
- What is the interest rate, and is it fixed or adjustable?
- What is the loan term for each loan option?
- Are there any origination fees or hidden costs?
- What is the total cost of the loan, including interest rate and closing costs?
- What is your average response time?
- What documents are required for prequalification?
- What is the minimum credit score needed for loan approval? How does this impact my interest rate?
- How long will it take to process and close my loan?
- Will my loan be serviced by your institution? How does loan servicing work?
- What is your rate lock policy? Do you offer a “float down” option (which allows you to lower your locked-in rate due to improved market conditions), and what does this cost?
- How long have you been in business?
- Can you provide references or share customer reviews?
- How can I stay in touch throughout the process?
“Above all, ensure that the lender understands your financial situation and offers the kinds of loan products that meet your needs,” advises Holman. These can include conventional, FHA, USDA, and government home loans.
If you don’t qualify for a loan from a direct lender, bank, credit union, mortgage banker, correspondent lender, or portfolio lender, consider applying for funds from a hard money lender or other source, but be mindful of the costly and limiting tradeoffs involved.
The bottom line
When it’s time to purchase or refinance a home, it always pays to shop around and compare options carefully.
“Remember that your choice of a mortgage lender isn’t just a transaction – it’s a pivotal step toward turning your homeownership dreams into reality or having a more affordable or flexible refinanced mortgage,” Ali says. “As you navigate the complexity of loan options, consider this journey not just a search for the lowest rates but an interview for a financial partner who understands your unique scenario and long-term goals.”