What Are the Main Types of Mortgage Lenders?

Photo to accompany story about mortgage lenders. Twenty20
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Finding the right mortgage lender is just as important as purchasing the right home. And there are many to choose from, too.

A mortgage with a low interest rate and attractive terms can save you thousands — even tens of thousands — over the course of the loan. So it’s important to do some research beforehand to compare various lenders and their offerings. If you skimp during the home-financing process, you could be stuck with a too-expensive loan.

What Is a Mortgage Lender?

A mortgage lender is a bank, credit union, or financial institution that offers home loans to those looking to buy a home. A typical mortgage is taken out for anywhere from 15 or 30 years and offers either a fixed or adjustable interest rate. And in exchange for the loan, you’ll make monthly payments, plus interest, through the end of the loan term.

To get a mortgage, you need to prove to the lender that you’d be a trustworthy borrower. This is done during the application process, which usually requires a hard credit inquiry (a credit check documented on your credit report that results in a temporary decrease to your credit score) and detailed information about your existing assets, debts, and income. 

Finding a mortgage lender — and going through the underwriting process for mortgage approval — is typically a lengthy process that can take weeks or months.

Pro Tip

Always vet the lenders you’re considering. You can find ratings, customer complaints, and any lawsuits against the lender through the Better Business Bureau and your state attorneys general’s office.

Types of Mortgage Lenders

There are two main types of mortgage lender: direct lender and mortgage broker. Each type has its benefits and drawbacks, so you’ll have to weigh your financing needs with what a company can offer you. Regardless of your final choice, you’ll want to apply to multiple lenders, whether it be a bank, credit union, or online lender (directly or through a broker).

“I always recommend four or five lenders at the beginning, so you get a sense of what the market is offering you for the kind of loan you’re going for,” says Ilyce Glink, CEO of Best Money Moves and author of 100 Questions Every First-Time Home Buyer Should Ask. Having multiple offers on hand allows you to make an informed decision when it comes time to buy a home. 

Direct Lender

A direct lender is a bank, credit union, or online company you apply directly to, in order to get approved for a mortgage. With this option, there’s no intermediary involved — you just send an application yourself and see if you qualify. Some examples of direct lenders include Chase, PNC Bank, Quicken Loans, and Navy Federal Credit Union. Here are the benefits and drawbacks of each.

Banks

Banks are the most common and recognizable mortgage lenders. In addition to offering checking and savings accounts, national and regional banks also originate loans for prospective homebuyers. With big banks, such as Bank of America and Wells Fargo, the benefit is obvious: convenience. These types of banks are ubiquitous, and if you’re an existing customer with a good track record, you may be more likely to get approved for a mortgage or receive a low interest rate. Regional banks offer that same benefit as well, along with more personal customer service and local expertise. 

However, banks tend to have more stringent rules (like higher credit scores and rigorous documentation requirements), and it may be more difficult to get a mortgage if you don’t have good credit.

Credit unions

Credit unions are nonprofit, member-owned financial institutions that typically serve a community, whether it be a region, organization, profession, or faith. A credit union usually offers the same services as a bank, but membership is closed to only those who meet the eligibility criteria. And because they’re nonprofits, credit unions exist to benefit its members — meaning, borrowers benefit from lower interest rates and more flexible underwriting processes. 

Credit unions are also generally known for offering better customer service; people are able to spend more time with loan officers and often have better chances at getting a mortgage if they have poor or fair credit, due to more lenient standards. However, if you’re seeking a non-traditional mortgage (like a jumbo loan), you may not be able to go through a credit union because of limited product offerings.

You can find credit unions in your area by using locator tools from Credit Unions Online and the National Credit Union Administration.

Online lenders

Over the past twenty years, non-bank online lenders like Quicken, Guaranteed Rate, and Better.com have offered alternatives to your traditional brick-and-mortar loan experience. These lenders offer an entirely online application experience, which includes the underwriting, and closing process. And they aren’t tied to specific locations like regional banks and credit unions are. Many online lenders, unlike large banks, specialize in only mortgages, and you may be able to get a lower interest rate if you have excellent credit (though with interest rates now, the difference may be marginal). 

The downside to applying through an online lender is that the customer service experience isn’t quite as robust. If you’d prefer more guidance through the mortgage application process, you may want to look elsewhere. Online lenders typically offer hotlines for customer questions, but you’re less likely to develop a long-term working relationship with your lender as you might with a credit union.

Mortgage Broker

A mortgage broker is a third-party that takes the information from your application and uses their partnerships with lenders to apply on your behalf. A broker is able to select from a number of mortgage lenders, which includes banks, credit unions, and online lenders, and negotiate the best mortgage interest rates and terms for your financial needs. Keep in mind: a mortgage broker is not the same as a mortgage banker, a loan officer who is employed by a bank and originates loans using the bank’s funds.

Licensed mortgage brokers are typically employed by local, independent brokerage firms and collect a commission from the homebuyer, lender, or both, at closing. Brokers are especially useful for non-traditional buying situations and borrowers without a straightforward employment and credit history.

“If you’re self employed or have [multiple] jobs, or if there are multiple people buying, you may want to work with a mortgage broker that will have access to different kinds of investors who are willing to work with different sorts of loans,” says Glink. She also suggests using a broker if you’re looking to buy a multi-family building or take out a jumbo loan. Keep in mind you may have to pay a broker’s fee — typically 1% to 2% of the loan amount — at closing.

Lender TypeBankCredit UnionOnline LenderOnline Lender
Pros-Wide range of loans and services
-May have 24/7 customer service
-Potentially lower rates
-Nonprofit model
-Emphasis on personal relationships
-Potentially lower rates
-Not tied to location
-No in-person application requirements
-Potentially lower rates
-Broker applies and negotiates on your behalf
-Good for non-traditional borrowers and home purchases
Cons-Rates may be higher than those from online lenders and credit unions
-May have stringent borrower qualifications
-Must meet credit union eligibility requirements
-May not underwrite non-traditional home purchases
-One-on-one customer service difficult to get -May have to pay a broker’s fee