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.
- A mortgage lender provides the funds needed to buy or refinance a home.
- Borrowers can choose from several lender types, each with unique benefits and drawbacks.
- Shopping around can help you find better loan terms and lower interest rates.
- Some lenders offer faster processing, while others may provide more flexible terms or lower fees.
Check your mortgage loan options with Refi.com.
What is a Mortgage Lender?
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 borrower’s creditworthiness, the value of the property being purchased, and other relevant factors.
Fortunately, borrowers can explore several lender options when seeking financing.
Different types of mortgage lenders
Let’s take a closer look at the handful of lender options available to most homebuyers and owners and examine the pluses, minuses, and best candidates for each.
1. 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.
Pros:
- Straightforward application process and quicker loan approvals than other options
- Loan servicing often remains with the same lender after closing
Cons:
- Direct mortgage lenders often have a finite amount of money to use to purchase loans, so they might have limited programs and rate flexibility.
- Rates and terms may not be as competitive as others.
2. Banks That Lend Mortgage Loans
Many traditional banks, as well as credit unions, offer mortgage loans along with other banking and financial services. Traditional banks are the most common sources of mortgage loans today.
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.
Pros:
- Convenient for existing customers who may receive loyalty discounts
- Wide range of loan products and local branch support
Cons:
- Stricter approval criteria and longer processing times
- Potentially less flexibility on qualification standards
3. Mortgage Bankers
Mortgage bankers are institutions or individuals who specialize in originating, underwriting, and funding mortgage loans.
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 and non-conforming loan products that meet secondary market standards, and they may offer more flexibility in underwriting.
Pros:
- Access to both conforming and non-conforming loan types
- Personalized service and flexible underwriting standards
Cons:
- Fees and interest rates can vary widely
- May have fewer in-house loan options compared to large banks
4. Correspondent Lenders
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.
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.
However, be prepared to pay additional fees for items such as origination and appraisal. The different lending standards correspondent lenders must meet are set by the investors who later purchase these loans, which means the borrower’s rules and requirements may be stricter.
Pros:
- Wide selection of loan products
- Faster, more personalized service than big banks
Cons:
- Higher origination or appraisal fees
- Loan requirements may be influenced by the investors who purchase their loans
5. Portfolio Lenders
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. 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 that 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.
Pros:
- Flexible approval criteria that can accommodate nontraditional borrowers
- Custom loan terms and personalized underwriting
Cons:
- Higher interest rates to offset lending risk
- May impose stricter borrower requirements
6. 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.
Hard money lenders are popular among borrowers 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, because they are known for exorbitantly high rates.
Pros:
- Fast approval and funding times
- Creditworthiness isn’t as important
Cons:
- Extremely high interest rates and fees
- Short repayment terms and higher risk of default
How to Choose the Right 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.
Compare Loan Options
To get the best rate, you should request quotes from at least three different lender types. Compare not only the interest rates but also the loan terms, fees, and closing costs.
Evaluate Service and Responsiveness
A responsive lender can make the mortgage process smoother. Ask about communication methods, average response times, and loan officer availability.
Understand the Total Loan Cost
Review the annual percentage rate (APR), origination fees, and closing costs. A slightly lower rate might not save you money if fees are higher.
Assess Flexibility and Fit
Make sure the lender offers loan products suited to your situation, whether that’s a straightforward conventional loan or a government-backed option such as an FHA, VA, or USDA loan.
Verify Reputation and Transparency
Research reviews, ratings, and business history. Transparent lenders provide clear loan estimates and honest timelines.
The Bottom Line
When it’s time to purchase or refinance a home, it always pays to shop around and compare options carefully.
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