For many Americans, mortgage shopping is a crucial first step in the homebuying process. While securing a home loan is a prerequisite for many prospective homebuyers, finding the perfect lender is often classified as a stressful and complicated experience.
Shopping around for the right lender can feel confusing and slightly intimidating due to the various companies and lenders available.
Understanding the differences, benefits and drawbacks of each type of mortgage lender can help you narrow down your search and hopefully ease your concerns.
In this guide, we’ll clearly define what makes a company a mortgage lender, which entities provide home loans and outline the various types of lenders, discussing the advantages and disadvantages of each.
Moreover, we’ll offer some actionable tips to help you select the best mortgage lender for your specific needs.
What Is A Mortgage Lender?
A mortgage lender is a financial institution, mortgage bank or any other entity that offers and underwrites home loans. Similar to other loans, mortgage lenders use a variety of metrics to determine your ability to repay the loan.
Mortgage lenders also establish the terms, interest rate, repayment schedule and other significant aspects of a home loan.
If you’re not an all-cash buyer, mortgage lenders are generally the first party prospective homebuyers connect with.
Who Provides Mortgages?
We’ve established that a mortgage lender is a party or entity that offers and underwrites home loans. Now, let’s discuss where you can get a mortgage.
There are hundreds of thousands of companies that provide mortgages, but they generally fall into one of three following categories.
Credit unions
Credit unions are not-for-profit financial institutions dedicated to serving its members rather than shareholders. They prioritize their members and community rather than necessarily earning a profit, meaning they return profits back to the membership through lower loan rates and higher dividends on deposit accounts and products.
For that reason, you must meet membership requirements to obtain a mortgage from a credit union. However, you don’t have to be a member to apply for a home loan with a specific credit union.
Credit unions generally offer a range of mortgage products, such as fixed-rate or adjustable-rate conventional loans.
Additionally, credit unions may also offer government-backed mortgages, including:
- Federal Housing Administration (FHA) Home Loans
- United States Department of Agriculture (USDA) Home Loans
- Veterans Affairs (VA) Home Loans
Credit unions are generally smaller in size than big banks. Depending on the credit union, they may have limited home loan options. You should inquire about the home loan options before applying for a mortgage at a credit union.
Credit unions typically require you to submit an application, identification, and proof of income and down payment to evaluate your eligibility. Additionally, they’ll pull your credit report to assess your creditworthiness.
Credit unions have steadily gained market share when it comes to mortgage originations. As stated in the Credit Union Times, Credit unions accounted for 8.2% of first-mortgage originations in the third quarter of 2020.
According to the Quarterly Credit Union Data Summary published by the National Credit Union Administration, there were 5,133 federally insured credit unions around the country in late 2020.
Mortgage bankers
A mortgage banker may be an individual or entity that originates, funds and sometimes services home loans. Most mortgage lenders in the United States are classified as mortgage bankers, including credit unions, big banks and online mortgage lenders.
Since most mortgage lenders in the U.S. are considered mortgage bankers, you can find a mix of home loan options. For example, they may offer a 30-year fixed-rate mortgage, 15-year fixed-rate mortgage, adjustable-rate mortgage (ARM), government-insured loans, interest-only loans and jumbo loans.
Mortgage bankers will work with borrowers to help select the best loan from their collection. Mortgage bankers can’t access loans from other institutions, so you’ll have to meet the requirements for one of the options they choose.
If the mortgage banker decides to service the loan, they’ll fund it by borrowing money at short-term rates from a warehouse lender. When the loan closes, the mortgage banker will sell it on the secondary market to either Fannie Mae or Freddie Mac, federal agencies that back most U.S. mortgages, or to a private investor.
Mortgage bankers may ask for your credit report, proof of income and assets, information about your liabilities and more to determine if you qualify for a specific type of home loan.
Mortgage brokers
Mortgage brokers are licensed and regulated financial professionals who work with the borrower and the mortgage lender. Mortgage brokers are not lenders themselves. Instead, they act as the intermediary between you and the financial institution.
Mortgage brokers may partner with various lenders to offer their clients a breadth of options that they might not otherwise find on their own.
Like mortgage bankers, mortgage brokers will ask for documentation, such as information about your income, assets and liabilities. Additionally, they’ll pull your credit report.
The difference is that the mortgage broker will gather the information and provide you with details on loans that you qualify for. Furthermore, a mortgage broker may negotiate terms on your behalf.
Mortgage brokers may be a good route for individuals looking to save time shopping for the perfect lender.
Different Types Of Mortgage Lenders
There are various types of mortgage lenders in the primary mortgage market you may encounter while on the hunt for the perfect mortgage.
Let’s delve into some of the most common types of mortgage lenders and their benefits.
Direct mortgage lenders
Direct lenders are financial institutions that provide home loans directly to borrowers without the need for a middleman. Direct lenders originate the loans themselves.
This type of mortgage lender may use their own funds or borrow from somewhere else. Mortgage banks, credit unions and portfolio lenders are some examples of direct lenders.
Direct lenders are there with you throughout the entire loan process. They’ll originate, underwrite, process and close the loan in-house.
The process to obtain a loan from a direct lender is straightforward. You’ll need to meet credit score and down payment requirements and fill out an application. Once your application is processed, it’ll move to the underwriting process, where an underwriter will thoroughly check to see if you qualify for the loan based on the information provided.
Obtaining a mortgage through a direct lender can be an excellent option for individuals who want to go through the mortgage process rather quickly.
However, the main drawback of direct lenders means you’ll have to apply to each one individually.
Retail lenders
Retail mortgage lenders are similar to direct lenders. However, the main difference is retail lenders offer mortgages to consumers rather than institutions. They work directly with prospective homebuyers throughout the entire transaction.
While credit unions, mortgage bankers and banks are considered direct lenders, they also fall under the retail lender designation.
To obtain a home loan from a retail lender, you’ll have to meet the same requirements mentioned above.
Retail lenders can be a good choice for borrowers looking for various mortgage options to choose from.
Wholesale mortgage lenders
Wholesale mortgage lenders are financial institutions that fund home loans and provide them to third-party entities such as credit unions, mortgage banks and mortgage brokers.
The borrower most likely will never speak to a wholesale lender during the mortgage process. The wholesale lender may originate, fund and potentially service the loan. In addition, they’ll set the terms of the loan.
The borrower would only work with the entity providing the mortgage. For example, the underwriting process will remain with the third party while the wholesale lender finds appropriate loans based on the applicant’s qualifications.
The wholesale lender may sell the loan on the secondary market through Fannie Mae or Freddie Mac when the loan closes.
Warehouse lenders
Warehouse lenders assist mortgage companies by offering loans through short-term funding. After the loans are sold on the secondary market, the warehouse lender will be repaid for their line of credit.
Like wholesale lenders, warehouse lenders do not work directly with borrowers. They use mortgages as collateral until the mortgage bank or lender repays the loan.
How To Choose A Mortgage Lender
There is no one-size-fits-all approach to finding the perfect mortgage lender. Ultimately, you’ll want to find a lender that offers the best service tailored toward your specific goals and needs.
First-time homebuyers may need a little more guidance throughout the entire process. In that situation, a lender that can answer all your questions and clearly explain all home loan options available to you may be the best fit.
For borrowers who want to refinance their current mortgage, you’ll want to find a lender that provides that service.
Moreover, government-backed loans may be the most suitable option for your current financial situation. Shopping around to find a lender who offers government-insured loans with the best terms and rates may be ideal.
The key to choosing a mortgage lender is to ask the mortgage specialist specific questions based on your overall needs and goals.
Some of the questions you may want to ask include:
- What will my fees and payments be?
- Which types of mortgage terms do you offer?
- What credit qualifications do you require?
- What’s the down payment needed to buy a house?
- What will closing costs be?
- Is there a prepayment penalty?
Asking the right questions can guide you to make the right decision on a mortgage lender and get the best mortgage terms and rates possible.
Finance The Purchase Of Your New Home With Arizona Central Credit Union
Understanding where you can obtain a mortgage and knowing the differences between the various types of mortgage lenders can help you narrow down your search to find the right lender for you.
If you’re starting to shop for mortgages, consider Arizona Central Credit Union. We make the home loan process simple and straightforward.
We offer some of the best rates across the Grand Canyon State. Additionally, we provide various mortgage options, including conventional mortgages, FHA home loans, VA home loans, USDA mortgages, jumbo loans and much more tailored to your needs.
Contact a mortgage specialist today and see how we can help you secure the home of your dreams.
