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When you’re in the market for a home, you’re probably going to get to know a mortgage lender. And they’re going to get to know you — or at least, your finances — inside and out.
So, what is a mortgage lender and what role do they play in the homebuying process? Before you make each other’s acquaintance, peruse this primer on how these financing institutions work.
What is a mortgage lender?
A mortgage lender is a bank or financial company that provides financing that’s related to real estate. Some lenders, like your big retail bank, also offer auto loans, personal loans or student loans; some specialize in mortgages and other home-related loans. They offer funding towards the purchase, construction or improvement of land and property.
In short, a mortgage lender provides you with the funds to buy a home. Then, every month you make payments that go towards paying off your loan balance.The real estate in question usually acts as collateral for the loan.
You can, and should, shop for different loans at different mortgage lenders to compare loan terms and identify which ones offer the best rates, fees and repayment terms for your situation. Try getting preapproved or prequalified from a few different lenders to see what offers fit best for you.
How mortgage lenders work
When you need a mortgage, a mortgage lender will have you complete an application so it can assess your ability to afford a home loan in general. Based on the information you provide, the lender will decide whether you’re qualified and, if so, set the maximum loan amount it’ll give you and the interest rate it’ll charge on that amount. It will also base these terms on an appraisal to determine the value of the home.
The relationship doesn’t necessarily stop after you’ve closed on the mortgage, and receive the funds. 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 big brand-name financial institutions. Lenders can be banks, credit unions or mortgage companies (many of the latter are exclusively on-line companies). The best lenders offer different incentives, such as lower APRs or zero fees. This means you might have a different set of criteria at one lender compared with others when shopping around for the right match.
So, what is a mortgage company going to do to get you set up with a home loan? It varies by lender type, so it helps to look more closely at your options.
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.
Direct lenders function a lot like retail lenders, except that while the latter might offer a variety of other products, a direct lender specializes in mortgages. A mortgage bank is one type of direct lender. They’re called direct lenders because they directly originate their own loans.
Portfolio lenders fund their home loans with their own money, and tend to hang onto them (as opposed to selling them to investors, as other lenders do). As a result, they aren’t subject to some of the underwriting criteria that guides other mortgage lender options. If you need a jumbo or other type of non-conforming loan, for example, a portfolio lender might be right for you.
If you get a home loan through a mortgage broker, a wholesale lender might be behind it. These lenders offer the loans they originate through third parties, who interface with the homebuyer; they don’t deal with consumers directly. After closing, many wholesale lenders sell the mortgage on the secondary market and let a different financial institution service the loan.
The answer to “what is a mortgage company?” has evolved with the internet. Some financial institutions primarily operate online. You might apply for the loan using an online form rather than by meeting with a loan officer, for example. Because they have less overhead, these digital enterprises may be able to offer lower rates and fewer fees, depending on your eligibility criteria. But you’ll generally get less personal service if you go this route.
Just like a wholesale lender, warehouse lenders don’t interface with consumers. Instead, they offer the funding other homebuyer-facing institutions and individuals need to get the loan going. Warehouse lenders offer this financing with a tight timeline, and the expectation is usually that the loan will get sold on the secondary market right after closing, at which point the warehouse lender gets repaid.
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 loans can usually close quickly with fairly flexible underwriting criteria, but they come with two big downsides. First, you’ll likely need to pay hefty origination fees. Secondly, hard money loans generally need to be repaid quickly (e.g., in a few years). As a result, they may appeal to house flippers but generally aren’t a go-to option for traditional homebuyers.
Is it better to get a mortgage from a bank, mortgage company or an online lender?
There’s no one right answer to this since every lender offers different features and terms. But the best way is to compare at least three lenders, one of each type, when mortgage-shopping. Make a decision based on:
- Interest rates – The lower the interest rate, the less you have to pay over the life of the loan as you pay back your principal, or original loan amount. While your rate is largely based on your credit score, credit history and debt-to-income ratio (DTI), the rate you are offered will vary based on the lender you choose.
- Ease of communication – What does a mortgage lender do to win you over? Can you make payments online, over the phone, through an app or another way? Does your potential lender contact you through emails or text? The more your lender opens up the communication channel, the easier it’ll be for you to stay on top of mortgage payments. Missing a mortgage payment not only causes your credit score to drop, but also could lead to default and foreclosure on your home.
- Fees – What is a mortgage lender going to charge that you’ll have to pay out of pocket? Sometimes lenders will roll fees into the home loan rather than have the borrower pay them upfront through closing costs. Some fees can be negotiated, but many can’t.
- Down payment requirements – Your down payment amount might be based on a variety of factors, like your creditworthiness and DTI ratio. Compare lenders to see which ones have affordable and flexible down payment requirements.
Next steps for finding a mortgage lender
There are plenty of mortgage lenders to choose from. Compare banks, credit unions and online lenders to see which ones might be the best mortgage lender for you. Generally, that means they offer the lowest interest rate, fewest fees and most friendly down payment requirements.
When choosing a lender, you should also consider factors unrelated to finances. For instance, do you want to be able to visit your lender to talk about your loan in-person? If so, a local bricks-and-mortar bank or credit union might be better for you. If you prefer to use an online lender for easy application and approval, you might not need to look at traditional banks and credit unions.
FAQs: Frequently asked questions about mortgage lenders
A mortgage lender originates and funds the home loan, while a servicer takes care of the loan after closing, ensuring that the homebuyer makes the necessary monthly repayments to repay the loan.The institution you applied to and acquired the mortgage from may or may not be the same company that services your mortgage through the life of the loan.
According to 2022 Home Mortgage Disclosure Act data, the top five biggest mortgage lenders are Rocket Mortgage, United Shore Financial, LoanDepot.com, Wells Fargo and Fairway Independent.