Types of Lenders

Homebuyers have choices when seeking mortgage lenders. It pays to learn as much as you can about loan terms and types of mortgages before a home purchase. For example, government-backed real estate loans are available through the:

• Federal Housing Administration (FHA)
• U.S. Department of Agriculture (USDA)
• U.S. Department of Veterans Affairs (VA)

Borrowers should learn about different types of home loans, such as FHA loans, VA loans, and USDA loans, before applying. But whether they’re seeking an adjustable-rate mortgage or a traditional 30-year fixed-rate loan, homeowners should learn about different lenders and mortgage companies behind these types of mortgage loans.

In general, a conventional mortgage isn’t guaranteed by the government. Most home loans are conventional loans. Whether you’re doing a refinance or you’re taking out a home equity loan, you’ll have a monthly mortgage payment. Many factors will affect your payment size, such as your down payment, upfront closing costs, and private mortgage insurance (PMI) premiums. But just as importantly, the type of lender you work with can affect your loan terms.

Three Main Types of Lenders

The three main types of lenders are:

• Mortgage brokers (sometimes called "mortgage bankers")
• Direct lenders (typically banks and credit unions)
• Secondary Market Lenders (which include Fannie Mae and Freddie Mac)

See FindLaw's Mortgage and Loan Basics and Qualifying for a Mortgage sections for more articles and resources.

Different Types of Loans

There are many other types of mortgages and lenders. For example, when your loan options are limited, a hard money lender might charge higher interest rates to loan you money in the short term. But most first-time homebuyers with good credit scores may prefer fixed-rate mortgages with lower interest rates. The eligibility criteria and repayment terms for different loans will depend on:

• Your loan amount and the duration of the life of the loan
• Whether it’s a non-conforming jumbo loan (which exceeds loan limits set by the federal government) or a conforming loan (which meets government limits)
• Your debt-to-income ratio, or how much you make versus how much you’ll owe
• Whether you’re refinancing, buying a home for the first time, or getting an investment property

Depending on the kind of lender you’re working with, you may be offered a different type of loan. Below is a summary of the three main types of lenders.

Mortgage Bankers and Brokers

A mortgage broker can submit a mortgage loan to many different lenders and typically has access to several types of loan programs. A mortgage broker can shop for the best and most competitive interest rates and terms available, tailored to meet a borrower's needs. Some mortgage brokers charge processing or origination fees. Mortgage bankers are lenders large enough to originate loans and create pools of loans. Some companies don’t sell directly to those major investors. But they sell their loans to mortgage bankers. They often refer to themselves as mortgage bankers as well.

Direct Lenders

A direct lender loans the money directly to the borrower. Banks and credit unions are often direct lenders. While brokers typically are licensed to operate in just a few states, most direct lenders may operate in all 50 states to find the best mortgage. Importantly, direct lenders and mortgage brokers offer roughly the same rates and loan products. But you may have to pay a little more for the services of a broker since they will also get a cut on the transaction.

Secondary Market Lenders

Secondary market lenders include the following:

• Federal National Mortgage Association (FNMA or Fannie Mae)
• Government National Mortgage Association (GNMA or Ginnie Mae)
• Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)

Many retail lenders actually receive their funds from a secondary market lender. These secondary financial institutions have assisted the national mortgage market by allowing money to move easily from state-to-state. The movement of loan funds helps to avoid a situation where mortgages are only available in certain areas or states. Also, the secondary lenders have established regulations and guidelines that help the general public.

Talk to a Lawyer

Choosing the right lender can be confusing, to say the least. You might also find it challenging to negotiate a loan with favorable terms. A real estate lawyer can review the paperwork for you and make sure you’re getting a fair deal. They can also communicate to mortgage lenders on your behalf to make sure your rights are protected.