When it comes time to get a mortgage, one of the first decisions you’ll need to make is choosing what type of mortgage lender you want to work with. There are several different types of lenders, each with their own pros and cons. Doing your research on the different types of mortgage lenders can help ensure you find the right loan product and services for your unique needs and financial situation.
Overview of Mortgage Lenders
At a basic level, a mortgage lender provides the financing for you to purchase a home. The main types of mortgage lenders include:
- Mortgage brokers
- Banks & Credit unions
- Mortgage bankers
- Online lenders
- Portfolio lenders
- Wholesale lenders
Lenders offer a variety of mortgage products featuring different interest rates, terms, and eligibility criteria. When you take out a mortgage, you agree to repay the money you borrowed, plus interest over a set repayment schedule, usually 15 or 30 years.
Mortgage Brokers
A mortgage broker serves as an intermediary between you and the actual mortgage lenders. Brokers are licensed professionals who can help you compare multiple lender options to find the best rate and product for your needs.
The main advantages of using a mortgage broker include:
- Access to many lenders – Brokers work with dozens or even hundreds of lenders, giving you more choice.
- Mortgage expertise – Brokers are very knowledgeable about the home financing process and different loan options.
- Assistance tailored to your profile – They can advise you on how to improve your credit or financial situation to get approved.
- Legwork done for you – Brokers handle shopping different lenders and getting quotes.
The main downside is that brokers charge a commission for their services, typically 1-2% of the total loan amount. Overall though, working with a broker can simplify the process and help ensure you get the best possible deal.
Banks and Credit Unions
Banks and credit unions that offer mortgage lending are considered retail lenders. They work directly with home buyers. The advantages of getting a mortgage from a retail lender include:
- One-stop shop – Easy to bundle your mortgage with other services like checking/savings accounts.
- Local branches – Ability to meet in person and talk face-to-face with a loan officer.
- Relationship – If you already bank there, familiarity with your financial profile.
- Loan variety – Banks offer many types of loan products, not just mortgages.
- Reliability – Established institutions with solid track records.
However, the downside is that you can only choose from that lender’s own mortgage offerings. The terms and rates may not be as competitive as specialized mortgage lenders.
Mortgage Bankers
Mortgage bankers focus solely on originating and selling mortgage loans. They provide funding for loans in one of two ways:
- Use their own funds to directly lend money to borrowers.
- Partner with a wholesale lender to provide the funding.
Mortgage bankers cater to a broad range of borrower types and offer conventional and government-backed mortgage loan products. Their expertise can provide an efficient loan experience.
Online Mortgage Lenders
Online lenders provide mortgage loans entirely over the internet, without physical branches. The advantages of online lenders include:
- Ease of use – Apply and upload documents easily online.
- Cost savings – Online lenders tend to offer lower interest rates and fees.
- Fast process – Technology streamlines the approval process.
- Accessibility – Apply from anywhere on any device.
Just be aware that if you prefer face-to-face guidance, online lenders may not be the right fit. Read customer reviews to ensure good service.
Portfolio Lenders
Portfolio lenders fund mortgage loans with their own capital, rather than selling the loans to the secondary market. This gives portfolio lenders more flexibility in setting their own lending criteria.
The advantages of portfolio lenders include:
- More customized options – Can create loans tailored to unconventional borrowers who don’t meet typical bank standards.
- Retain servicing – Ongoing relationship for the life of the loan.
- Faster process – Make quick lending decisions without waiting on investors.
However, portfolio lending tends to come with higher interest rates and fees given the increased risk.
Wholesale Lenders
Wholesale lenders provide the capital for mortgage loans originated by third parties like brokers, community banks and credit unions. The Wholesale lenders don’t work directly with the public.
These lenders play an important role in supplying funding for the mortgage industry. Partnering with a wholesale lender gives mortgage brokers access to competitive loan products to offer their clients.
How to Choose the Right Lender
With so many mortgage lending options, it can feel overwhelming to decide what type of lender to use. Here are some tips on choosing the right lender for your needs:
- Consider your financial situation – Your credit score, income, assets, and debts will determine what loan programs you qualify for. Find lenders that work with profiles like yours.
- Compare interest rates – Even small rate differences of 0.25% can impact costs over the loan term.
- Research fees – Look at origination fees, application fees, and points to understand the total cost.
- Ask about down payments – Each lender has minimum down payment requirements. Ask if low down payment options are available.
- Customer service – Look at lender reviews and complaints regarding their level of service.
- Examine types of loans offered – Determine if the lender provides the loan types you need.
- Get prequalified – Go through the prequalification process with a few lenders to compare options.
Find the Best Mortgage Lender for You
While it can take some research, comparing different mortgage lenders is crucial to finding the right loan product with the best terms, rates, and costs. Be sure to evaluate your own financial situation and home buying goals first. This makes it easier to determine which type of lender is likely to be a good match. Consider both online lenders as well as your local bank or credit union. Mortgage brokers can also simplify the process by providing multiple lending options. Take your time shopping around to find the ideal mortgage lender to finance your next home.
Frequently Asked Questions
What is the difference between a mortgage broker and mortgage lender?
A mortgage lender actually provides the financing for your home loan, while a mortgage broker works on your behalf as an intermediary between you and lenders to find you the best loan program.
How do mortgage lenders make money?
Mortgage lenders earn revenue through the interest you pay on the loan, along with origination fees they charge. Many lenders sell loans to investors shortly after closing, making additional profit on the sale.
Should I use an online lender or local lender?
It depends on your preferences. Online lenders tend to have lower rates but local lenders provide more personalized guidance. Compare options to make the right choice for you.
Are banks the only mortgage lenders?
No, many non-bank institutions like credit unions, mortgage companies, and portfolio lenders also offer home loans. Expand your search beyond banks to find the best rate and product.
What credit score is needed for a mortgage lender?
Exact credit score requirements vary by lender, but most require a minimum score of 620-640 to qualify. Specialized programs exist for borrowers with lower credit scores. Talk to a lender to see what you qualify for.
