What to Know About the Different Types of Mortgage Lenders

Gone are the days where the only options for obtaining a mortgage involved visiting the nearest branch of the bank or savings and loan.

Even a credit union, while providing more options, is now only one of several different choices these days when it comes to choosing a lending institution.

Learn about the different mortgage lender options available and discover which type of lending institution best matches your needs. 

Mortgage Lenders and Brokers

Today, there are many types of mortgage lenders, though they can be broken down as either a mortgage lender or a mortgage broker.

• A mortgage lender is an entity or person that actually draws up the loan and provides the funding to purchase a home. They have certain financial and credit parameters that must be met in order to qualify. These are usually banks and other lending or financial institutions.
• A mortgage broker is an entity or person that acts as a clearinghouse for multiple lenders to locate one that offers the ideal terms and rates to meet a buyer's unique criteria. The broker typically acts only as an agent to connect you and the lender. The lender is who you are actually borrowing money from.

In many cases, borrowers may save money and receive a loan with better terms by going through a mortgage broker rather than by directly approaching the mortgage lender. Though each mortgage lender and broker is different so you should shop around for the best loan terms.

Retail and Wholesale Mortgage Lenders

Retail and wholesale lenders are often another area of confusion -- and for good reason. In many cases, a lender can play both roles which can add to the complexity of the situation. 

• Retail lenders deal directly with individual homeowners by either lending money from their coffers or acting as an agent for another financial institution. In many cases, this type of lending is typically only one service that a financial institution might offer. 
• Wholesale lenders may be banks and other financial institutions but they don't work directly with consumers. Instead, they offer their loan products through credit unions, mortgage brokers or other banks. To make matters even more confusing, in many cases, wholesale lenders are often large banks that offer their own separate retail services -- including mortgages. 

Warehouse Lenders 

A warehouse lender is easily confused with a wholesale lender. One glaring difference is the fact that a warehouse lender doesn't lend money through other institutions. Instead, they simply provide money to mortgage lenders like banks who then set the terms of the loan. 

Mortgage Bankers

In most cases, when you obtain a loan through a mortgage banker, you aren't borrowing their money. Instead, a mortgage banker often borrows the funds they need from a warehouse lender while paying short-term loan rates for doing so.

Fannie Mae and Freddie Mac are agencies that typically act as mortgage bankers. Their role within the mortgage business enables them to mandate underwriting standards that apply to most of the mortgages drawn up in this country.  An individual borrower cannot receive a mortgage directly from either Fannie Mae or Freddie Mac. However, once you obtain a mortgage, your mortgage may be transferred or sold to these entities.

Correspondent Lenders

A correspondent lender is a term that applies to the lender after a loan has been issued.

Working with an investor -- or sponsor -- the correspondent lender sells them those loans that meet the particular stipulations the two parties have established beforehand. Fannie Mae and Freddie Mac are two common correspondent lenders. 

Portfolio Lenders 

Portfolio lenderssometimes offer flexibility that might be lacking in some of the other options for mortgages. Because these lenders keep their own portfolios of money that are free of other investors, portfolio lenders are often not bound by many of the requirments noted above. Instead, they are usually able to have more flexibility in the terms they allow for their customers' loans.

This makes portfolio lenders a particularly attractive option for some mortgage seekers who may not fit into the typical homeowner mold. For some who have a rocky credit history but have ample financial resources, for example, or want to take out a jumbo loan, contacting a portfolio lender has been a successful move. 

Hard Money Lender

A hard money lender is often used as a last resort when a borrower cannot qualify for another lending program. Hard money mortgages are typically backed by private parties who have money to invest and lend. In these cases, buyers should be prepared for higher interest rates than typically found in the market, as well as more stringent down payment requirements.

Because hard money lenders often expect to be repaid quickly, such loans are typically best reserved for investment properties where a quick turnaround is expected, instead of a long-term loan for a home you expect to live in for decades.

Seller Financing

In some cases, where the seller owns the home out-right with no mortgage of their own, they may offer a seller financed mortgage. In other words, the seller of the home loans you the money through a mortgage on the home. Seller financing is not as common as in the past, though can be an important option for those borrowers that cannot get a mortgage through traditional means.

As you can see, the landscape of mortgage lenders is no longer straightforward or transparent. Remember that in today's mortgage world, it's always best to shop around and look at all of the different types of mortgages that might be available to you.