5 Types of Mortgage Lenders You Need to Know Before Getting a Loan

If you’re in the market for a home, you may be considering a mortgage to finance your purchase. One of the most important decisions you’ll make is choosing the right mortgage lender. With so many options available, it can be overwhelming to decide which lender is right for you. In this article, we’ll discuss the types of mortgage lenders to help you make an informed decision.

Understanding Different Types of Mortgage Lenders

Mortgage lenders fall into one of six categories. Which type is ideal for you will depend on how much hands-on involvement you enjoy, how much research you’re prepared to do, and any limitations you may have on the kinds of loans you’ll consider.

• Direct lenders
• Mortgage brokers
• Correspondent lenders
• Wholesale lenders
• Portfolio lenders

Direct Lenders

Banks, credit unions, internet companies, and other businesses are considered “direct lenders” if they provide mortgages to borrowers directly. They design and finance mortgages monitor their repayment, and either do it themselves or hire someone else to do it. They also set the loan conditions and rates, which might vary greatly depending on the lender you choose.

Pros

• From application to close, the entire process is handled by a single organization.
• Typically, borrowers engage with a single loan officer.
• They could provide affordable rates and costs.

Cons

• Rates and conditions differ greatly amongst lenders.
• You must conduct your own comparative research.

Mortgage Brokers

Independent, regulated specialists that act as matchmakers between lenders and borrowers are known as mortgage brokers. Brokers typically receive payment from lenders in the form of a modest percentage of the loan amount (normally 1 to 2 percent) in exchange for their services (but passes on to you as part of the cost of your mortgage). 

Pros

• They carry out the research for you and compare rates from other lenders on your behalf.
• With only one request, you may evaluate several loans and interest rates.

Cons

• Even if the lender isn’t the ideal choice for you as a borrower, brokers could give higher priority to lenders who offer them the largest fee.
• Brokers are paid a commission by the lender. You may find a cheaper loan if you dint use a broker. However, you would have to do all the research yourself.

Correspondent Lenders

After a deal closes, correspondent lenders immediately sell the loans they have funded to larger lending institutions on the secondary mortgage market.

Pros

• A variety of loan packages are available to borrowers.
• They could provide reduced costs and interest rates.

Cons

• It’s possible that you won’t know your mortgage lender right away.
• It could be challenging at first to monitor and manage your monthly mortgage payment depending on when your loan is sold.

Wholesale Lenders

Wholesale lenders never deal directly with borrowers. In order to provide their loan products at lower rates, they typically work with mortgage brokers and other third parties. They also rely on brokers to assist borrowers with the application and approval processes.

Pros

• If you are unable to satisfy the conditions for a traditional loan, the wholesale lender may have fewer requirements. This increases your chances of acceptance.
• They could provide loan conditions that are more favorable or cheaper.

Cons

• To obtain a wholesale offer, borrowers must go via a third party (such as a broker).
• As a result of the intermediary, it might not be the greatest bargain.

Portfolio Lenders

Portfolio lenders create and finance loans using the bank deposits of their customers so they may keep the loans after closing rather than selling them. Portfolio lenders may include local banks, credit unions, and savings and loan organizations.

Pros

• Can assist borrowers with special conditions to get a loan.
• Possibility of working with a regional organization

Cons

• Possibly restricted loan amounts
• Less favorable terms & conditions