What Is a Mortgage Lender: Definition and Types of Lenders

17 min.

Purchasing a house can be tough, and you may need help understanding how mortgages work. The more you learn about the mortgage lenders available and the key difference between them, the easier it becomes to make an informed decision and avoid all the pitfalls of choosing wrong. Here, you will find the details on mortgage lenders, and how to choose a suitable one.

What Is a Mortgage Lender: Definition and Types of Lenders

What is a Lender?

The first step to figuring out the role of a lender is to understand who they are. A lender can be a financial institution or a bank providing its clients with different lending options. All mortgage loan providers set guidelines on minimum requirements for a loan. If an applicant doesn't meet them, their application gets rejected. Also, mortgage lenders set the terms and conditions of mortgage loans.

A lender reviews your mortgage application, verifies information from the loan application, and offers you certain loan terms based on your financial status. After the approval of mortgage loans, a mortgage lender gives you the money you need to buy a house.

A mortgage lender can be an individual, a group, or a separate financial entity. A good example of a lender is a bank. Different banks provide unique conditions and borrowing costs for home loans. A bank is usually the first pick for future homeowners, regardless of their income, loan amount, or down payment size. 

Wells Fargo, Bank of America, and other well-established personal finance, companies can be great examples of mortgage companies. They provide loans to tens of thousands of borrowers daily. Their services are noted for being efficient and well-organized.

A Realtor vs. a Lender

Even though real estate agents and lenders help a home buyer throughout the mortgage process, their roles are different. The lender is the one who originates the loan - it's the entity that gives you access to the money needed to purchase a house. A real estate agent, however, is the person who shows properties, acts as an intermediary between buyers and sellers and provides additional information if required. A real estate agent connects buyers with sellers, while a lender gives buyers the money needed to purchase the house.

A Lender vs. Mortgage Broker

As already established, a lender or mortgage, is an entity that gives the future homeowner the money needed to complete the purchase. Mortgage brokers work as connectors between buyers and a lender. It's an intermediary that helps buyers find the best lender with the best possible interest rates and loan terms. Mortgage brokers can help streamline the homebuying process of not only zeroing in on the best lender for the specific circumstances and the budget but also applying with the lender and receiving approval.

A Bank vs. a Mortgage Lender

The bank is a type of lender. It's the most common type of lender. Bank offers fewer loan options because all banks risk losing their own funds, while lending, so the rules aren't as flexible. Because of that, banks also have stricter credit score requirements and pay greater attention to your credit report. Aside from advantageous terms on loans, one of the obvious pros of working with banks is that they will be the only ones handling your loan. There's no risk of it being sold to a third-party company.

A bank is a type of mortgage company. However, only some mortgage companies are banks. Unlike other lending companies retail lenders, the difference is that banks can handle deposits, savings, and more.

What is a Mortgage Service Provider?

A mortgage servicer is a company that helps process a loan. Put differently, the company handles transactions, defaults, monthly payments, origination fees, and more. Often, the lender services its own loans. Loan servicing companies have different methods of providing services, and sometimes they can be quite useful. The costs of these services can impact the loan amount, but insignificantly.

Today 22.04.2024 Mortgage Rates
Today 22.04.2024 Mortgage Rates

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How do Mortgage Lenders Work?

The process of mortgage lending begins with finding out which lender offers the best conditions for home loans, proceeds with applying with the said lender by submitting the needed paperwork, being pre-approved, and signing the final mortgage loan and documents (including the loan agreement).

Common loan types include:

  • Fixed-rate. The interest rate for this kind of mortgage remains the same throughout the loan's entire life. Even though monthly payments tend to be lower, you'll pay more in the long run.

  • Adjustable-rate. The interest rate can be adjusted depending on the financial situation. Multiple lenders usually offer adjustable-rate loans with a five or seven-year period of a fixed rate.

  • Balloon. With this type of loan, mortgage payments get bigger and bigger over the course of the loan. They balloon to a much larger amount.

  • FHA, USDA, and VA loans. Here, the United States government acts as a lender. Depending on eligibility, these types of loans can be the best option.

  • Jumbo loan. Down payment requirements are strict, but this loan can help you purchase a very expensive property.

Types of Mortgage Lenders

To choose the right lender with the best deal most suitable terms, you need to be aware that different types of lenders are available. The most common ones include the following:

  1. Banks. National and multinational banks are the go-to options for most people. Since their services are so vast and their reputations are so strong, these mortgage lenders attract many borrowers. Banks also offer advantageous terms because their financial structure is much more advanced and well-organized, allowing them to generate profit even if they don't charge nearly as much interest. Regional and community banking institutions can also be the best loan providers under certain circumstances.

  2. Credit unions. Credit unions are also popular with future home buyers. Bank or credit union is a big question that arises during the initial stages of the mortgage process. If you have a credit union membership, this type of financial institution is the best option you can opt for when borrowing money. The biggest advantages of credit union unions are fewer/lesser charges, a more personalized approach, and more secure financing.

  3. Federal institution. There are three types of government-backed loans: VA loans, USDA loans, and FHA loans. Each has its requirements and advantages, but they can be a great option for those who qualify. The biggest downside of loans from federal institutions is that they might be hard to qualify for.

  4. Mortgage brokers. Mortgage brokers are not lenders but can help you compare lenders and determine which lending option works best for you. Most brokers handle the application process on your behalf as well. They can help you qualify for better terms with other mortgage lenders too. So, even if brokers aren't lenders, they are the ones people turn to when looking to buy a house.

  5. Online lenders. These lenders are usually smaller, but their requirements are often less strict than those of more traditional lenders. The interest rates offered by direct lenders are lower because online-only lenders can cut costs by not renting out offices all over the country.

Depending on what factor is used to classify the loan providers, we can create an additional list of lender types, which includes the following:

  • Direct Lenders. Direct lenders are the ones that provide the money to you with no third parties involved.

  • Mortgage Bankers. Similar to a mortgage broker, but with an important difference: a mortgage banker closes the loan in their name. In other words, mortgage bankers use their own money.

  • Portfolio Lenders. Portfolio lenders differ from other lenders because they use their funds only. Portfolio lenders are better suited for those interested in investment property.

  • Retail Lenders. Banks and credit unions are retail lenders. Being a retail lender means lending money directly to people, not companies.

  • Hard Money Lenders. Hard money lenders are usually willing to risk their money and accept applications that other lending companies turned down.

  • Wholesale Lenders. Wholesale lenders offer loans through 3rd parties, including other banking institutions, credit unions, or mortgage brokers.

  • Warehouse Lenders. It's the company that offers short-term financing to mortgage lenders. Usually, warehouse lenders are repaid once the loan is sold to third parties.

  • Correspondent lender. Correspondent lenders are the ones that handle your loan throughout the origination process and sell it to third parties as soon as the opportunity presents itself.

How to Choose a Mortgage Lender

Picking the right lender is fairly straightforward and can be broken down into five key steps.

  1. Improve your financial situation. Your personal finance needs to be in order before you apply for a loan. Several ways of improving your credit score include paying bills on time, lowering your DTI (debt to income ratio), and more. A byproduct of improving your financial situation would free up more money for the down payment.

  2. Settle on a loan type. Figuring out which kind of home loan works best for you can change everything. Depending on your financial situation and the house you want to buy, you may find suitable government loans with no down payments, fixed-rate loans, and mortgages with longer repayment terms. Determine the time and cost of the loan you can cover.

  3. Compare terms and rates. You need to understand that estimates aren't final offers but give you a good idea of what to expect from specific lenders. Be sure to carefully compare all the important factors, including the interest rate, prepayment penalties, and other charges. Finding a lower interest rate can save you much money throughout your home loan life.

  4. Receive pre-approval. Input some information to receive an offer tailored to your situation. It's not the fastest process, but you'll get a much closer estimate of the terms and conditions. You will have to submit certain documents to allow the lender to assess your financial status and come up with the best-suited terms.

  5. Compare terms and rates again. You need to apply with at least three lenders to get a good idea of what you can expect. Applying with more mortgage lenders is okay to ensure you have the best terms possible. Once you have a more specific offer presented to you hard money lenders, it's time to make your final choice. If the closing costs and the loan terms are suitable for you, you can sign the loan agreement after carefully reading it.


Who is the top mortgage lender?

The list of top lenders includes Rocket MortgageLoanDepot, and several other companies that continue to originate hundreds of thousands of loans yearly. There are also lending industry stalwarts such as JPMorgan Chase and Wells Fargo.

What are the 3 types of lenders?

The most common types of loan providers include direct lenders, mortgage bankers, and secondary market loan providers. It must be noted that there are different lender classifications exist.

Are wholesale mortgages cheaper?

Wholesale lenders can offer more advantageous options, especially those with less-than-stellar credit history. However, each situation is different, and it's hard to be sure if wholesale lenders are the better option in your specific situation.

What happens when you meet with a mortgage lender?

Meeting with a lender can be carried out in several ways, including face-to-face, online, or over the telephone. When you meet with a lender, you describe your financial status and what home you expect to purchase. The lender tries to find the best option for your specific circumstances and requirements.

What are hard money lenders?

Hard money lenders are typically private investors or companies that offer short-term loans with higher interest rates and fees than traditional lenders. These loans are often used for real estate investments or other projects where quick access to cash is needed and traditional financing is not an option.

The term "hard money" refers to the fact that these loans are secured by a hard asset, such as real estate or equipment, rather than by the borrower's creditworthiness or income. Hard money lenders may be more willing to lend to borrowers with poor credit or a history of financial difficulties, as long as there is sufficient equity in the collateral to cover the loan amount.

Hard money loans are typically short-term loans with terms of a few months to a few years. The interest rates and fees on these loans can be significantly higher than those charged by traditional lenders, and the borrower may be required to put down a larger down payment or have a higher equity stake in the collateral.

While hard money loans can be a useful tool for investors or entrepreneurs who need quick access to cash, they are not without risks. Borrowers should carefully consider the terms and fees associated with the loan and have a clear plan for repaying the loan before moving forward with this type of financing.

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