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What is a lender? Mortgage lenders explained

Aly J. Yale
The Mortgage Reports contributor

What is a lender?

What is a lender? Put simply, a lender is a person or party who loans out money. In many cases, it’s a bank, credit union, or corporate entity, but sometimes, it may be an individual, a group of individuals, or an investor. 

Lenders can come into play in many situations. You might need one if you want:

  • A personal loan
  • To finance a car purchase
  • To buy a home
  • To pay for college

Regardless of what they’re loaning you money for, you can expect any lender to require repayment — plus interest.

Interest is the cost you’ll pay to borrow the money. And interest rates (the amount you pay) can vary greatly from loan to loan and borrower to borrower.

For mortgage loans specifically, your lender and interest rate can affect your borrowing costs by thousands of dollars.

Find a low mortgage rate today (Oct 28th, 2020)

What is a mortgage lender and how do they work?

A mortgage lender is a financial institution or organization that loans out money for real estate purchases.

Here’s how they go about business:

  1. A borrower finds a home they would like to purchase. Once a sales contract is in place, the borrower fills out an application and provides certain financial documentation
  2. The lender evaluates the borrower’s financial situation, as well as the risk they present (how likely they are to repay or not repay their loan). This information is used to set their maximum loan amount and the interest rate they’ll be charged to borrow the money
  3. The lender has the home appraised to be sure it’s worth the money they’re being asked to loan out. If it is, the transaction proceeds. If it’s not, the buyer will need to make up the cash out of pocket
  4. Finally, the borrower closes on the home, making a down payment on the house — paid to the lender — plus closing costs
  5. The borrower then makes monthly payments to the lender until the remainder of the loan is paid off

Mortgage lenders also offer what are called refinances.

These are loans designed for existing homeowners, allowing them to essentially replace their old mortgage with a new one.

Homeowners do this to lower their interest rate, reduce their monthly payment, or speed up their repayment timeline.

4 types of mortgage lenders

There are four categories that mortgage lenders generally fall into: banks, credit unions, non-bank lenders, and brokers. (Brokers are a little different — but we’ll cover that below). 

Let’s look at all four, as well as when you might want to use each of them:

1. Banks

Many financial institutions that offer banking also offer lending services. Chase, Bank of America, and Wells Fargo are all good examples here. Often, applying for a mortgage with your home bank can qualify you for certain perks and discounts over other lenders. Generally, banks are known to have the highest interest rates among lenders. They also may take longer to close on loans due to the volume of applications they receive.

2. Credit unions

Credit unions often offer mortgages, too, and they often come with some of the lowest rates around. This is because credit unions are generally non-profit organizations, so they’re not looking for a hefty profit margin on the loans they give out. The downside is that not everyone is eligible for credit union membership, and even if they are, there may be a limited number of loans available.

3. “Non-bank” lenders

Finally, there are also non-bank lenders, which basically includes any mortgage lender that’s not a bank or credit union. These can include online lenders like Better.com and Guaranteed Rate, as well as private mortgage lenders like Quicken Loans, Rocket Mortgage, and Loan Depot.

4. Mortgage brokers

You may have also heard the term “mortgage brokers,” but these aren’t the same as lenders. Mortgage brokers are more like personal shoppers for borrowers. They use their network of lenders to help a homebuyer find the best loan for their needs and budget. They’re not actually a lender themselves.

Find the right lender for you (Oct 28th, 2020)

How to choose a lender 

Comparing quotes from several mortgage lenders is a critical part of the homebuying process. According to Freddie Mac data, getting three quotes can save you about $1,500, while five quotes can save you an average of $5,000.

So, how do you do this? First, apply with at least three lenders.

>> Related: How to shop for a mortgage and compare lenders

Head to their websites, fill out their online application forms, and give them a little information about your homebuying plans. You can usually get a quote within a few hours to a day or two.

You can also use something like The Mortgage Reports rate quote tool to get multiple quotes with one single form.

Once you have the quotes in hand (they’ll come in the form of what’s called a “loan estimate”), you should look at the following points to compare your options:

  • Interest rate: Interest rates vary greatly between lenders, so see how your quotes measure up. The differences might surprise you
  • APR: This is your total annual cost to borrow the money, plus any fees or other charges required. These can vary, too
  • Origination, underwriting, and application fees: Do the lenders charge fees for any of their services? If they do, compare the cost of those and see what comes out on top
  • Prepayment penalties: Some lenders charge a penalty if you pay off your loan early. Make sure you know which of your options does and doesn’t
  • Estimated closing costs and cash-to-close: This is what you’re expected to owe for the loan’s closing and on closing day. These can vary greatly as well

You should also be sure to consider customer service when choosing a lender (online lender reviews can help here). And ask for recommendations from your neighbors, friends, colleagues, or your real estate agent, too. 

Finally, take your desired loan program into account as well.

Some lenders serve niche markets and can be a good choice if your heart is set on a specific mortgage product (VA or USDA loans, for example). 

Mortgage lender FAQ 

What does a mortgage lender do? 

A mortgage lender loans out money for borrowers to purchase or refinance a home. In exchange for the loan, they charge interest, which is compounded monthly and paid over the entire length of the loan. 

How do I find mortgage lenders?

You can find mortgage lenders online, through your real estate agent, or by using a mortgage broker. You can also look to your personal bank or local credit union for a mortgage loan.

Is a mortgage lender a bank? 

A mortgage lender can be a bank, but it doesn’t have to be. Credit unions can also be mortgage lenders, and there are also non-bank lenders and online lenders you can look to.

Is it better to get a mortgage from a bank or broker? 

It’s best to compare your options. Your home bank can often offer certain loyalty discounts and perks you might not find elsewhere, but a broker may be able to find you a better deal elsewhere. Keep in mind that brokers charge a commission (though this may come from the lenders). Be sure to shop around and know where your cash is going.

How many mortgage lenders should I apply with? 

It’s generally smart to apply with at least three unique lenders — a bank, a non-bank lender, and one other. This allows you to get a good grasp on the bigger picture and really home in on the best deal for your needs. 

What questions should I ask a mortgage lender? 

There are lots of questions to ask a mortgage lender. First, ask what loan programs you qualify for. There are several types of loan products, and the ones you qualify will determine your required down payment, the terms you have available, the qualifications you’ll have to meet, and more. You should also ask about the loan’s rate, APR, any available rate locks (and their cost), whether mortgage insurance will be required, and for a full loan estimate detailing your expected costs.

Does locking a rate commit you to a lender? 

No, locking a rate does not commit you to a lender. You’re free to change lenders anytime before you close on the loan. Just keep in mind that starting over with a new lender may mean new fees (or paying the same fees multiple times), and it could also delay your closing date.

What is a lender credit? 

A lender credit is money your lender gives you to help cover some of your closing costs. In exchange for these credits, lenders will generally charge a higher interest rate on the loan.

Today’s mortgage rates from top lenders

One of the most important things to know about mortgage lenders is that they all charge different interest rates. And those rates vary by customer. So you’ll want to shop around before you choose a lender for your home loan.

A slightly higher or lower rate can mean a difference of tens of thousands of dollars over the life of your loan.

So when you’re ready to start the process, make sure you check in with at least three lenders (but ideally more) before signing onto a mortgage.

You can get started right here with no obligations to buy or refinance.

Verify your new rate (Oct 28th, 2020)

Step by Step Guide

Buying a Home