Types of mortgage lenders and how to choose

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There are many types of mortgage lenders to suit different homebuyer needs. But having a lot of choices can be overwhelming if you aren’t sure which direction to go. Understanding the types of lenders and their differences will help you find the right mortgage lender for your situation.

What is a mortgage lender?

A mortgage lender provides financing related to real estate, whether that’s to buy a property, construct one or fix one up. Some types of lenders, like a bank, also offer other types of loans and services, while others deal exclusively in home loans.

When you apply for a mortgage, the lender assesses your ability to repay it based on your credit and financial picture. The lender then determines whether you’re qualified to borrow the funds and, if so, how much and at what interest rate.

Your relationship with your lender doesn’t necessarily stop after you get your mortgage. The lender either manages the repayment process (including helping you navigate relief options, if it comes to that) or outsources this work to a servicer.

Types of mortgage lenders

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

Retail lenders

When you picture a mortgage lender, you’re probably thinking of a retail lender. Credit unions and banks fall under this category. They’re called retail lenders because, like retail stores, they deal directly with consumers. These lenders almost always adhere to the mortgage qualifying standards laid out by the government — more on that here — such as a minimum credit score and maximum debt-to-income (DTI) ratio. This is so the lender can sell your mortgage to investors, bringing in more capital to make more loans.

Direct lenders

Direct lenders function a lot like retail lenders, except that while retail lenders usually offer various other products, a direct lender specializes in mortgages.

Portfolio lenders

Portfolio lenders offer mortgages they keep in their portfolio rather than sell to investors. As a result, they aren’t subject to much of the underwriting criteria that guide direct or retail lenders.

Wholesale lenders

If you get a home loan through a mortgage broker, a wholesale lender is likely behind it. These lenders offer loans that originate from third-party brokers who interface with borrowers; they don’t deal with consumers directly. After closing, many wholesale lenders sell the mortgage to investors and let a different financial institution service the loan.

Online lenders

Some mortgage lenders only operate online. You can apply for the loan using an online form rather than by meeting with a loan officer. Because they have less overhead, these digital enterprises can offer lower mortgage rates and fewer fees.

Warehouse lenders

Just like a wholesale lender, warehouse lenders don’t interact with consumers. Instead, they offer the funding other borrower-facing institutions need to originate the loan. Warehouse lenders typically offer this financing within a tight timeline, with the expectation that the loan will be sold right after closing, at which point the lender gets repaid.

Correspondent lenders

Correspondent lenders originate their own loans but not with the goal of servicing them. Instead, they generally work with larger lenders who buy the loan after closing. That assumes, of course, that they can sell the loan. If they can’t, the correspondent lender will be the one to service your loan.

Hard money lenders

Hard money lenders can close quickly with fairly flexible underwriting criteria, but they come with two big downsides. First, you might need to pay a hefty origination fee. Second, hard money loans generally need to be repaid quickly. They can be an appealing option for a house-flipper, but generally aren’t the go-to option for your average borrower.

Bank vs. non-bank mortgage lenders

A non-bank mortgage lender is simply a lender that doesn’t deal with consumer deposits. It might be an independent mortgage company, an online lender or both. Understanding the benefits and drawbacks of each will help you determine which is right for you.

Banks

Pros

• Ability to bank and pay mortgage all in one place
• Branch locations for in-person service
• Local, regional and national options
• Possible discounts for banking customers

Cons

• Can offer more competitive rates, sometimes without fees
• Experienced in qualifying many kinds of borrowers and credit situations
• Focus on customer service, with a range of hours
• Offer specialized and standard loan options

Non-banks

Pros

• Strict underwriting
• Typically only offer standard loan options

Cons

• Often less transparency around rates and fees; need to provide financial info first
• Some only operate online

How to choose the right mortgage lender for you

“Choosing a mortgage lender is a crucial step in the home-buying process,” says Anna Pitcock, senior mortgage loan officer with Ruoff Mortgage. “To help you make an informed decision, start by researching and comparing lenders.”

To compare lenders, consider the following factors:

• APR and interest rate. The lower the interest rate, the less you’ll have to pay over time. The interest rate is just one piece of the annual percentage rate, or APR, however. The APR also includes the lender’s fees, points and other costs. Compare both of these figures to get a sense of which lender might be more affordable.
• Fees and other costs. In addition to asking for the APR, ask for a detailed breakdown of all fees the lender charges. “Lenders charge different fees, such as origination, application and closing costs, so it’s essential to get a detailed breakdown and understand all the fees involved,” says Pitcock. “If a lender is unwilling to provide this information, it is a red flag, even during prequalification.” Having this information will also help you make accurate lender comparisons and have negotiation leverage.
• Reputation. “Consider the lender’s reputation, as the responsiveness and helpfulness of their customer service can significantly impact your experience,” says Pitcock. “Choose a lender who is communicative and transparent, and look for reviews and testimonials from previous clients.” A lender with a reputation for strong customer service can make the process smoother and less stressful. Bankrate’s lender reviews can help with this part of the process.

FAQ

• What’s the difference between a mortgage lender and servicer?

  A mortgage lender originates and funds the home loan, while a servicer takes care of the loan after closing, ensuring that the borrower repays the loan. The institution you applied to and acquired the mortgage from might or might not be the same company that services your mortgage, and your mortgage can be serviced by more than one company over the loan term.

• Who are the largest mortgage lenders?

  According to 2024 Home Mortgage Disclosure Act data, the top five biggest mortgage lenders are United Wholesale Mortgage, Rocket Mortgage, Bank of America, Fairway Independent Mortgage and CrossCountry Mortgage.

• What is a mortgage broker?

  A mortgage broker is someone who partners with multiple lenders and acts as a go-between who matches borrowers with mortgage lenders. If you’re not sure which lender might be the best for you, a mortgage broker can help.