Types of Mortgage Lenders and How to Choose

Many people don’t give much thought to their mortgage lender, thinking they’re all the same. However, there is a number of different types of mortgage lenders to choose from, and understanding their differences can help you pick wisely.

There are banks, credit unions, mortgage brokers, online lenders, private lenders, and mortgage lenders. Each type has its own pros and cons, and knowing your options can ensure getting the right mortgage, whether you’re buying or refinancing.

In this article (Skip to...)

• Types of mortgage lenders
• Choosing a mortgage lender
• Pros and cons of different lenders
• The bottom line

Types of mortgage lenders

When buying or refinancing a home, understanding the various types of mortgage lenders is crucial to finding the right fit for your financial needs. Below, we break down the most common lender options to help you make an informed decision.

Banks

When some people think about getting a mortgage, whether they’re buying or refinancing their home, they might immediately think of a traditional bank. This can include national banks as well as smaller community banks.

These financial institutions are located on just about every corner and offer many different options. For this reason, they’re often the first choice for a conventional loan, a government loan, or fixed or adjustable rates.

Many traditional banks also offer other services, such as deposit accounts and car loans. In which case, some people might apply for a mortgage with a bank they’re familiar with or have an existing relationship with.

This is convenient. But depending on the bank, they might have stricter mortgage lending guidelines, eligibility requirements as well as a longer approval process.

Credit unions

Another option for getting a mortgage when buying or refinancing is using a credit union. These smaller financial institutions aren’t banks but rather not-for-profit member-owned institutions.

Joining a credit union and applying for a loan will require being a member. However, not everyone will meet the requirements for membership. To join, you might have to live in a certain city, work at a specific job, or have a family member who meets these criteria.

The good news is that some credit unions might offer better rates on mortgages, and members often enjoy more personalized customer service and less strict loan requirements.

Just know that since credit unions are smaller, they might not have as many loan products as a traditional bank.

Mortgage brokers

Regardless of the type of financial institution you use for a mortgage loan, it’s important to shop around and compare loan terms and interest rates to ensure you’re getting a good deal.

This can be time-consuming, though. Therefore, you might prefer working with a mortgage broker who acts as a middleman between borrowers and lenders.

Brokers typically have a large network of lenders, so based on your circumstances, they can shop around your application to help you find the best lender.

But while this excellent service saves you time, brokers typically charge a fee for their services. This can increase your mortgage-related expenses.

Online lenders

If you’re tech-savvy, you could also use an online lender when applying for a mortgage loan. Some aspiring homeowners prefer these services because they’re convenient and often have faster approval times compared to using a bank, credit union, or mortgage broker.

You’ll complete your application online and submit all documentation through an online portal. This streamlined homebuying process means you might be able to close sooner.

Since everything is done electronically, you might even get a lower interest rate since these companies have less overhead.

Mortgage lenders

There’s also the option of working with a lender that only focuses on mortgage loans. These differ from banks and credit unions, which offer a wider range of financial products.

One benefit of a mortgage lender is that they might offer unique mortgage solutions. This could include special first-time homebuyer loans and portfolio loans, which might benefit borrowers who need down payment assistance or have lower credit scores.

However, some of these loans might have higher interest rates.

Private lenders

Sometimes, you might not meet the lending guidelines set by a bank, credit union, mortgage lender, or online lender. In this situation, you might be able to get funding from a private lender.

These lenders can sometimes offer loans to individuals who don’t qualify for traditional financing. This might include people who have the income to qualify for a mortgage but can’t get approved due to their credit history, as well as self-employed borrowers who have difficulty verifying their income and real estate investors.

The downside is that these types of loans can be pricey. Since you’re a riskier borrower, you can expect higher interest rates, a bigger down payment, and shorter repayment periods.

Factors to consider when choosing a mortgage lender

Regardless of the type of lender you choose when buying or refinancing, here are a few factors to consider before accepting a loan.

1. Interest rates

Mortgage interest rates are not the same across the board, so it’s important to shop rates from several mortgage lenders. Even a small difference could end up costing you thousands over the life of the loan.

2. Fees and closing costs

Don’t forget about mortgage-related expenses when buying a house. In addition to the down payment, you’ll also have closing costs, which can include loan origination fees, appraisal fees, and other third-party expenses. Your lender will provide a breakdown of the expenses before closing

3. Customer service and support

The mortgage process can be stressful, so choosing a lender that offers good customer service and support is important. Before applying, consider calling or emailing the lender with questions to gauge their response time and helpfulness.

4. Loan products and flexibility

Mortgage loans are not one-size-fits-all, so it’s important to choose a lender that offers a variety of loan options. This ensures you find the right loan for your circumstances. Preview the lender’s website beforehand to get an idea of what they can offer.

5. Approval process and requirements

As you research different types of mortgage lenders, you should also inquire about the lender’s average approval time. Some mortgage lenders can process loan applications and close faster, while others may take longer. Additionally, ask about their debt-to-income ratio and credit score requirements before applying.

6. Reputation and reviews

Finally, check reviews to gauge if the lender is reliable. Read reviews on Google or the Better Business Bureau, and visit their social media pages. Also, to find the best mortgage lender, consider recommendations from family or friends who had positive experiences with a particular lender.

Pros and cons of different mortgage lenders

Unfortunately, no lender is perfect, and each option has its pros and cons. Here’s what you need to know before choosing one.

• Banks: Banks offer convenience and a variety of options, making them familiar to many borrowers. They also provide multiple financial products, which can be useful. However, they often have stricter lending guidelines and a longer approval process, which can be a drawback.
• Credit unions: Credit unions often provide better mortgage rates and more personalized service compared to banks. They may also have less strict loan requirements. On the downside, you need to meet membership requirements to join, and they might offer fewer loan products.
• Mortgage brokers: Mortgage brokers have access to a wide range of lenders and can help you find the best loan option. They can save you time by handling the search process. However, they usually charge a fee for their services, which can increase your overall mortgage costs.
• Online lenders: Online lenders are convenient and typically offer faster approval and lower interest rates due to their streamlined processes. But, they might lack a personal touch and provide limited face-to-face interaction, which some borrowers might prefer.
• Mortgage lenders: Mortgage lenders specialize in mortgages and often offer a variety of loan options tailored to specific needs. However, their loans might come with higher interest rates, and they generally provide fewer other financial products than banks.
• Private lenders: Private lenders can offer loans to individuals who don’t qualify with traditional lenders and provide fast approval times and flexible terms. Unfortunately, their loans often come with higher interest rates, larger down payments, and shorter repayment periods.

Upsides and Downsides of Different Mortgage Lenders

The bottom line on types of mortgage lenders

Banks, credit unions, brokers, online lenders, mortgage lenders, and private lenders each offer unique advantages and drawbacks. Therefore, consider factors such as interest rates, fees, customer service, loan products, approval processes, and reputation before applying.

By carefully researching and comparing your options, you can find the right mortgage lender based on your financial situation and home-buying goals.