While shopping for a home loan you might come across terms like retail lenders, direct lenders, mortgage brokers, and wholesale lenders.
Many borrowers simply look at the terms and the interest rate and if they are satisfactory, they go ahead and purchase the loan. They don’t really bother to find out what sort of lender they are going to deal with. However, if getting the best possible deal is the goal, you should understand the different types of mortgage lenders.
Here is a quick overview of different kinds of mortgage lenders. Note that many lenders offer more than one kind of products. If you want to lend money, you need to understand the difference between different types of lenders.
There is a difference between mortgage brokers and mortgage lenders. A mortgage lender is a bank that provides the money to buy the home. Before approving your loan application, they will verify the credit worthiness and financial credentials. They may also use these criteria to determine the interest rates.
The mortgage broker is merely an agent. The customer has to obtain the loan from a lender. Wholesale lenders may discount the rates when the loan is offered through a broker. But the broker may add his or her fee, so the customer is unlikely to get a lower rate.
Wholesale lenders do not normally deal directly with customers. Instead, they offer loans through mortgage brokers, other banks or credit unions. In this kind of lending, the money is provided by the wholesale lender and the name that appears on the loan documents is also that of the wholesale lender. The broker or the other bank merely acts as an agent.
Retail lenders provide mortgage directly to homebuyers. They may use their own funds. They may also act as the agent of a wholesale lender. Retail lending is usually just one of the products that large financial institutions offer. They may also offer institutional, commercial, or wholesale lending.
Warehouse lenders are not much different from wholesale lenders. There is one difference, though. Instead of providing their loans through brokers, they lend their money to other banks and allow them to offer their own loans.
Mortgage bankers don’t use their own funds. Instead, they borrow funds from warehouse lenders. They then sell the mortgage to investors. And as soon as the mortgage is sold, they repay the money borrowed from the warehouse lender.
Hard Money Lenders
These are private individuals who have money to lend. When a customer borrows from a hard money lender, they will have to pay high interest rates.
This kind of lenders issue loans using their own money and as such they can set the terms and conditions. Portfolio lenders are very choosy, but the rates are usually quite low.
A direct lender is a lender that issues its own loans using its own or borrowed funds. Some direct lenders are retail lenders.
A correspondent lender works with investors who purchase mortgages that meet a certain criteria.
Remember that these terms are not exactly mutually exclusive. However, they should give you a better understanding of the mortgage process.