Mortgage lenders are financial institutions that lend money to qualified borrowers who want to buy a home. There are many different types of lenders out there, so it’s helpful to know the differences when you’re trying to figure out which one is best for your situation.

What Is a Mortgage Lender?

The definition of a mortgage lender is a financial institution that lends money to homebuyers. These institutions determine whether to approve people for a mortgage, and they set the terms of the loan, such as how long it will take to repay and the interest rate.

It’s important to know what is a lender in real estate vs. a mortgage servicer. The servicer sends the borrower’s loan statements, processes their payments, tracks the principal and interest paid, and handles other day-to-day tasks involved with managing the loan. The servicer can be different from the lender.


How do lenders work?

When it comes to lending money, lenders usually follow a similar process, though the precise steps involved can vary depending on the lender:

  1. Preapprove a borrower for a mortgage. Getting preapproved is a step that qualified homebuyers can take to show real estate agents and sellers that they are serious about buying a home. A preapproval letter shows that a lender is tentatively willing to extend a loan to them, but it isn’t a commitment.
  2. Provide a loan estimate. Once the buyer’s offer on a home is accepted, they submit a mortgage application. After receiving the application, lenders are required to send a loan estimate to the buyer within three business days. Buyers use this document to compare mortgage offers.
  3. Decide whether to approve the loan. Once the buyer accepts a loan offer, the lender verifies their financial information and ensures they qualify for the mortgage in a process called underwriting. This includes ordering a home appraisal to make sure the loan amount is appropriate for the value of the property.
  4. Provide a closing disclosure. This document contains finalized details on the approved mortgage, including the projected monthly payments and closing costs. Lenders are required to produce the closing disclosure at least three business days before the buyer’s closing date.
  5. Go through closing. On closing day, the buyer signs all the loan paperwork, makes their down payment, pays closing costs, and receives the keys to their new home. The lender disburses the funds to the seller.
  6. Receive monthly mortgage payments. Until the loan is paid off, the borrower must make monthly payments to the lender.

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8 Types of Mortgage Lenders

There are many types of mortgage lenders. Here are the ones that a homebuyer may encounter.

1. Mortgage bankers

Good for: Working with the same person or institution from start to finish.

Lender examples: Bank of America, Chase Bank.

Mortgage bankers can be individuals or institutions, but they all originate and fund home loans. Borrowers work with them from the mortgage application to loan approval to closing.

2. Credit unions

Good for: Lower mortgage rates and more-flexible qualification requirements.

Lender examples: Alliant Credit Union, PenFed Credit Union.

Credit unions are owned by their members and not for profit, which means they can offer lower interest rates and fees. Members are also more likely to get personalized service, as credit unions often cater to local communitities. Compared with borrowing from a big bank, those with poor credit or no credit at all may have a better chance of getting a mortgage with reasonable terms from a credit union.

3. Hard money lenders

Good for: Real estate investors seeking short-term loans with fast funding.

Lender examples: Haus Lending, RCN Capital.

Hard money loans are typically used to purchase investment properties. They often offer short repayment periods and higher interest rates, and require a larger down payment compared to traditional mortgages. Hard money lenders care more about the value of the property than the borrower’s creditworthiness when deciding whether to extend a loan.

These lenders excel at quick closings, but due to the higher costs and risks, they aren’t a good choice for people who are looking to buy a place to live.

4. Retail lenders

Good for: Most borrowers with typical financial situations.

Lender examples: Bank of America, Alliant Credit Union.

A retail lender works directly with individual borrowers. There’s overlap with other types of lenders; mortgage bankers and credit unions are included in the retail lending category.

5. Direct lenders

Good for: Borrowers who want to avoid intermediaries.

Lender examples: Citibank, Wells Fargo Bank.

Direct lenders provide loans to borrowers without an intermediary such as a mortgage broker. Working with a direct lender allows borrowers to save money on broker fees. Again, there’s overlap with other types of mortgage lenders.

6. Portfolio lenders

Good for: People who don’t qualify for a conventional mortgage.

Lender examples: Needham Bank, North American Savings Bank.

Portfolio lenders can help borrowers who require a more flexible underwriting process get a mortgage. This is because lenders don’t sell portfolio loans on the secondary mortgage market. To do so, lenders must meet certain requirements set by the federal government. By keeping a loan in house, the lender can set its own terms and make it easier for a borrower to get approved.

In general, portfolio lenders are smaller financial institutions, such as credit unions.

7. Correspondent lenders

Good for: People who want to choose from a wide variety of loan products.

Lender examples: Truist Bank, Fifth Third Bank.

Correspondent lenders originate, underwrite, and fund home loans. They sell these loans to other financial institutions, which then become the mortgage servicers.

8. Online lenders

Good for: Tech-savvy borrowers seeking a streamlined mortgage process.

Lender examples: Ally Bank, Rocket Mortgage.

Online lenders don’t have physical branches, so borrowers can apply for a mortgage from the convenience of their homes. These lenders may offer lower interest rates as well, but their service might not be as personalized.

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How To Choose the Right Lender

A good place to start looking for a mortgage lender is your bank or credit union. Your existing relationship may help you get lower interest rates or certain fee discounts. However, that doesn’t mean you can skip comparison shopping. Reaching out to a few different lenders could help you find a better deal elsewhere.

“In today’s ever-changing real estate market, you need to use a local lender,” says Kurt Grosse, a Las Vegas-based Realtor. “Sticking with a local company can help make communication easier and eliminate delays in closing.”

It’s also important to consider your goals for the home you’re buying, such as whether you’re planning to live there for the long term or viewing it as an investment property.

“Higher-risk properties such as distressed homes, potential flips, or Airbnbs can usually be underwritten by a private lender or hard money lender,” says Doug Greene, owner of Philadelphia-based Signature Properties, a homebuying company.

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The Bottom Line on Different Types of Mortgage Lenders

Ultimately, what does a mortgage lender do? They provide loans to help qualified borrowers buy a home. If you’re in the market to purchase property, make sure to shop around and consider the different types of mortgage lenders. A mortgage is typically a long-term commitment, so it’s important to find a lender that is easy to work with and offers a good deal for your specific situation.