4 Types of Mortgage Lenders Explained

Mortgage lenders make long-term, fixed- and adjustable-rate loans for individuals to purchase homes. Your mortgage loan could come from a variety of sources for lenders in the financial services industry, or from an alternative source.  The following is a look at each of these mortgage lenders with details on where they get the money to loan you.

Banks and Credit Unions

Traditional lenders such as banks and credit unions offer home mortgage through extensive networks of local offices.

Banks have long been community-based lenders, even when the branch is owned by a bank with a national presence. They offer a full range of lending services, one of which is mortgages.

Credit unions are members-only, non-profit organizations that exist to offer a full range of savings and loan services to members. While once very restrictive in terms of who could join, credit union membership is now open to almost anyone.

In both cases, banks and credit unions, the money these mortgage lenders loan out comes from deposits raised through customers or members with savings and checking accounts.   Additionally, both banks and credit unions have local knowledge of real estate markets and can loan based on local conditions.

Mortgage Bankers

Mortgage bankers form a specialized niche of the lending industry. These firms, which often have offices nationwide, focus only on mortgage lending and do not offer other banking services. They do not accept deposits and so raise funds through other means, such as from the quasi-governmental institutions Fannie Mae and Freddie Mac.

An advantage of dealing with mortgage bankers is that their sole focus is mortgage lending. They are experienced dealing with borrowers who have a variety of needs, who face a variety financial situations and who have a variety of properties under consideration.

While some mortgage bankers service your mortgage for the life of the loan, many bundle mortgages together and sell them to other mortgage lenders who specialize in loan servicing. Mortgage bankers also profit from fees charged to originate and close your loans.  Mortgage bankers can be a good choice for the consumer because of their knowledge of the industry.

Mortgage Brokers

As with the mortgage bankers above, a mortgage broker can accept your application for a mortgage loan and, if you qualify, get it funded for you. Unlike banks, credit unions and mortgage bankers, mortgage brokers do not have their own source of funding. Working with several different lenders, they place your loan with another lender and collect a commission for originating and closing the loan. The majority of U.S. mortgages are handled by mortgage  brokers.  Mortgage brokers will compare rates and fees with several bankers and lenders to find the better fit or best loan option.  Additionally, brokers are knowledgeable and can close loans quickly, where lenders and bankers are slower and less efficient.

However, if a mortgage broker is tied to specific lenders, that do not offer the best deals, the advantage of shopping around is not there.  A special lender relationship can be an advantage, however, because the special relationship can help you get a loan, even with a poor credit history.

Private Funding

While far less common than traditional mortgage lenders, owner financing or private financing is a fourth area of home lending. Depending on economic conditions or personal financial circumstances, a homeowner sometimes will finance the sale of a home to a buyer. If the homeowner has substantial equity in the house and is reasonably assured of the buyer's ability to pay, this can be a long-term good investment. Similarly, an individual, usually a family member, with money to invest can loan money to buy a home. This is particularly attractive for young home buyers with no credit history but with parents who can help them get in a home.