Types of Mortgage Lenders and How to Choose

Key Points

• Mortgage lenders finance the purchase, construction, or renovation of a property. They also offer mortgage refinancing and some other mortgages.

• Many types of lenders, including banks, offer mortgages through various channels, such as correspondents, directly or wholesale.

• Some big mortgage names (e.g., Fairway and Rocket Mortgage) are direct lenders. They specialize in mortgages and work with borrowers from origination to financing.

What is a mortgage lender?

A mortgage lender provides financing related to real estate, whether to buy, build, or renovate a property. Some lenders, such as banks, offer other types of loans and services, while others deal exclusively with mortgage loans.

When you apply for a mortgage, the lender evaluates your ability to repay based on your credit and financial situation. The lender then determines whether you qualify to borrow the funds and, if so, how much and at what interest rate.

Your relationship with your lender continues after you get a mortgage. The lender manages the payment process (including helping you navigate assistance options, if necessary) or outsources that work to a servicer.

Types of Mortgage Lenders

There are many types of mortgage lenders, from local and regional lenders to brand-name financial institutions. Here is an overview:

Retail lenders

When you picture a mortgage lender, you probably think of a retail lender. Credit unions and banks fall into this category. They are called retail lenders because, like retail stores, they deal directly with consumers. These lenders almost always adhere to government-mandated mortgage eligibility standards (more on that here), such as minimum credit scores and maximum debt-to-income (DTI) ratios. This happens because the lender can sell your mortgage to investors, providing more capital to make more loans.

Direct lenders

Direct lenders operate similarly to retail lenders, except that while retail lenders may offer other products, direct lenders specialize in mortgages.

Portfolio Lenders

Portfolio lenders offer mortgages they hold in their portfolios rather than sell to investors. As a result, they are subject to only some of the underwriting standards that guide direct or retail lenders.

Wholesale lenders

If you get a home loan through a mortgage broker, there is likely a wholesale lender behind it. These lenders offer the loans they receive through third-party intermediaries who negotiate with borrowers. They do not deal directly with consumers. After closing, many wholesale lenders sell the mortgage to investors and let another financial institution service the loan.

Online lenders

Some mortgage lenders only work online. For example, you can apply for a loan using an online form instead of meeting a loan officer. Because they have less overhead, these digital companies can offer lower rates and fees.

Warehouse Lenders

Like wholesale lenders, warehouse lenders do not interact with consumers. Instead, they provide the financing needed to originate loans to other borrower-based institutions. Warehouse lenders typically offer this financing fixed-term, expecting the sale to close immediately after the loan is completed when the lender receives repayment.

Correspondent Lenders

Correspondence lenders originate your loans but need to service them. Instead, they typically work with larger lenders who buy the loan after closing. This assumes, of course, that they can sell the debt. If they can't, the correspondent lender will be the one who will service your loan.

Hard Money Lenders

Hard money lenders can usually close quickly with somewhat flexible underwriting standards, but they have two significant disadvantages. First, you may have to pay a hefty upfront fee. Second, hard money loans usually have to be paid off quickly. They may be attractive for home buyers, but there are other options for the average borrower.

Bank vs. Non-Bank Mortgage Lenders

A non-bank mortgage lender is simply a lender that does not deal with consumer deposits. This can be an independent mortgage company, an online lender, or both. Other significant differences include:

Banks

Pros	Cons
Ability to bank and pay mortgage all in one place	Can offer more competitive rates, sometimes without fees
Branch locations for in-person service	Experienced in qualifying many kinds of borrowers and credit situations
Local, regional, and national options	Focus on customer service, with a range of hours
Possible discounts for banking customers	Offer specialized and standard loan options

 

Non-Banks

Pros	Cons
Strict underwriting	Often less transparency around rates and fees; need to provide financial info first
Typically, only offer standard loan options	Some only operate online

 

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 & Interest Rate: The lower the interest rate, the less you will pay. However, the interest rate is only part of the annual percentage rate or APR. APR also includes fees, points, and other lender costs. Compare these figures to understand which lender may be more affordable.

• Convenience: How easy is it to contact the lender when you have questions or need help? Do you need to be able to visit the branch? Can you access the online portal to set up automatic payments or view account statements? Can payments be made over the phone or through the app? Consider what is important to you in terms of accessing your lender.

• Reputation: Some lenders are known for customer service, while others have received complaints. See third-party reviews and testimonials to see what previous customers have to say.

Frequently Asked Questions

What is the difference between a mortgagee and a servicer?

A mortgage lender originates and funds the mortgage loan, while a servicer handles the loan after closing, ensuring the borrower pays off the loan. The institution from which you apply for and receive a mortgage may be the same company that services your mortgage and may be serviced by more than one company during the term of the loan.

Who are the largest mortgage lenders?

Home Mortgage Disclosure Act 2022 data shows Rocket Mortgage, United Wholesale Mortgage, LoanDepot.com, Wells Fargo, and Fairway Independent as the top five mortgage lenders.