While many borrowers simply seek rates and terms that appear reasonable, it’s important that they understand the type of lender they’re dealing with.
Following are some of the most common terms you’ll come across when going through the process of choosing a lender.
Mortgage Lenders. Lenders are the ones who make the loan and provide the money you’ll use to buy your home. When meeting with lenders, you’ll have to provide a lot of financial background information. The lender will then set the mortgage interest rates and other loan terms accordingly.
Mortgage Brokers. Brokers work with multiple lenders to find the loan that’ll offer you the best rate and terms, so when you take out the loan, you’re really borrowing from a lender, not a broker. This is often one of the most confusing parts of the mortgage process for prospective buyers.
Mortgage Bankers. Most mortgage lenders are mortgage bankers, which means they don’t lend their own money, but borrow funds at short-term rates from warehouse lenders. Larger mortgage bankers will originate their own loans, which they’ll then sell directly to Fannie Mae, Freddie Mac, or investors.
Portfolio Mortgage Lenders. These lenders originate and fund their own loans, offering more flexibility in loan products because they don’t need to adhere to the guidelines of secondary market buyers. Once these loans are serviced and paid for on time for at least a year, they’re considered “seasoned” and can be sold on the secondary market more easily.
Hard Money Lenders. If you’re having trouble getting a mortgage and working with a portfolio mortgage lender, a hard money lender may be your last resort. These lenders are private individuals with money to lend, though interest rates are often much higher.
Wholesale Lenders. Wholesale lenders cater to mortgage brokers for loan origination but offer loans to brokers at a lower cost than their retail branches offer them to the general public. The result for the borrower? The loan costs about the same as if it were obtained directly from a retail branch of the wholesale lender.
Correspondent Mortgage Lenders. These lenders have agreements in place with one or more wholesale lenders to act as their retail representative so they lend directly to buyers and use wholesaler guidelines to approve and close loans with their own money. They also agree to buy back any loans they close that deviate from wholesaler guidelines.
Direct Mortgage Lenders. A direct mortgage lender is simply a bank or lender that works directly with a homeowner, with no need for a middleman or broker.