What Are the Main Types of Mortgage Lenders?

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 What Is a Mortgage Lender?

 What Is a Mortgage Broker?
 Key Points About Mortgage Lenders
 Mortgage Brokers
 Mortgage Bankers
 Retail Lenders
 Direct Lenders
 Portfolio Lenders
 Wholesale Lenders
 Correspondent Lenders
 Warehouse Lenders
 Hard Money Lenders
 Shopping for a Mortgage Online
 The Bottom Line

Shopping for a lender can feel confusing and a little intimidating. With so
many companies and types of lenders to choose from, you might feel
analysis paralysis. Understanding the differences between the main types
of lenders can help you narrow down the field.

The type of loan you choose is obviously important, but choosing the right
lender could save you money, time and frustration. That’s why taking the
time to shop around is crucial. It’s a crowded field, too. There are retail
lenders, direct lenders, mortgage brokers, correspondent lenders,
wholesale lenders, and others, where some of these categories can
overlap.

You’ve probably seen the terms "mortgage lender" and "mortgage broker"
in your home-buying research, but they have different meanings and
functions.1

What Is a Mortgage Lender?

A mortgage lender is a financial institution or mortgage bank that offers and
underwrites home loans. Lenders have specific borrowing guidelines to
verify your creditworthiness and ability to repay a loan. They set the terms,
interest rate, repayment schedule and other key aspects of your mortgage.
What Is a Mortgage Broker?
A mortgage broker works as an intermediary between you and lenders. In
other words, mortgage brokers don’t control the borrowing guidelines,
timeline or final loan approval. Brokers are licensed professionals who
collect your mortgage application and qualifying documentation, and can
counsel you on items to address in your credit report and with your
finances to strengthen your approval chances. Many mortgage brokers
work for an independent mortgage company so they can shop multiple
lenders on your behalf, helping you find the best possible rate and deal.
Mortgage brokers are typically paid by the lender after a loan closes;
sometimes the borrower pays the broker’s commission up front at closing.

Key Points About Mortgage Lenders

 Many mortgage lenders charge a fee for their services.
 Retail lenders provide mortgages directly to consumers.
 Direct lenders originate their own loans, either with their own funds or
borrowing them elsewhere.
 Portfolio lenders fund borrowers’ loans with their own money.
 Wholesale lenders (banks or other financial institutions) don’t work
directly with consumers, but originate, fund, and sometimes service
loans.
 Correspondent lenders are the initial lender making the loan and
might even service the loan.
 Warehouse lenders help other mortgage lenders fund their own loans
by offering short-term funding.
 Hard money lenders, usually private companies or individuals with
significant cash reserves, are often the choice for those who want to
flip a home after a quick renovation.

Mortgage Brokers
Mortgage brokers work with a host of different lenders, but it’s important for
you to find out which products those lenders offer. Keep in mind that
brokers won’t have access to products from direct lenders. You’ll want to
shop a few lenders on your own, in addition to one or two mortgage
brokers, to ensure you’re getting the best loan offers possible.

How They Get Paid

Mortgage brokers (and many mortgage lenders) charge a fee for their
services, about 1% of the loan amount.2 Their commission can be paid by
the borrower or lender. You can take a loan at “par pricing,” which means
you won’t pay a loan origination fee and the lender agrees to pay the
broker. However, mortgage lenders typically charge higher interest rates.
Some brokers negotiate an up-front fee with you in exchange for their
services. Make sure you ask prospective brokers how much their fee is and
who pays for it.

How They Help

Mortgage brokers can help save you time and effort by shopping multiple
mortgage lenders on your behalf. If you need a loan with a low down
payment requirement or your credit is not so pristine, brokers can look for
lenders that offer products tailored for your situation. Brokers typically have
well-established relationships with dozens, if not hundreds, of lenders.
Their connections can help you score competitive interest rates and terms.
And because their compensation is tied to a loan closing successfully,
brokers tend to be motivated to deliver personalized customer service.

Drawbacks
Once a mortgage broker pairs you with a lender, they don’t have much
control over how your loan is processed, how long it takes, or whether
you’ll receive final loan approval. This can add more time to the closing
process and frustration if delays arise. Also, if you choose a loan at par
pricing, your lender might charge a higher interest rate to cover the broker’s
commission, costing you more.

Mortgage Bankers
Most mortgage lenders in the U.S. are mortgage bankers. A mortgage bank
could be a retail or a direct lender—including large banks, online mortgage
lenders like Quicken, or credit unions.

These lenders borrow money at short-term rates from warehouse lenders

(see below) to fund the mortgages they issue to consumers. Shortly after a
loan closes, the mortgage banker sells it on the secondary market to
Fannie Mae or Freddie Mac, agencies that back most U.S. mortgages, or to
other private investors, to repay the short-term note.

Retail Lenders
Retail lenders provide mortgages directly to consumers, not institutions.
Retail lenders include banks, credit unions, and mortgage bankers. In
addition to mortgages, retail lenders offer other products, such as checking
and savings accounts, personal loans and auto loans. 
Direct Lenders
Direct lenders originate their own loans. These lenders either use their own
funds or borrow them from elsewhere. Mortgage banks and portfolio
lenders can be direct lenders. What distinguishes a direct lender from a
retail bank lender is specialization in mortgages.

Retail lenders sell multiple products to consumers and tend to have more
stringent underwriting rules. With a niche focus on home loans, direct
lenders tend to have more flexible qualifying guidelines and alternatives for
borrowers with complex loan files. Direct lenders, much like retail lenders,
offer only their own products so you’d have to apply to multiple direct
lenders to comparison shop. Many direct lenders operate online or have
limited branch locations, a potential drawback if you prefer face-to-face
interactions.

Portfolio Lenders
A portfolio lender funds borrowers’ loans with its own money. Accordingly,
this type of lender isn’t beholden to the demands and interests of outside
investors. Portfolio lenders set their own borrowing guidelines and terms,
which may appeal to certain borrowers. For example, someone who needs
a jumbo loan or is buying an investment property might find more flexibility
in working with a portfolio lender. 

Promissory Note
KEY TAKEAWAYS

 A promissory note is a financial instrument that contains a written

promise by one party (the note's issuer or maker) to pay another
party (the note's payee) a definite sum of money, either on demand
or at a specified future date.
 A promissory note typically contains all the terms pertaining to the
indebtedness, such as the principal amount, interest rate, maturity
date, date and place of issuance, and issuer's signature.
 In terms of their legal enforceability, promissory notes lie somewhere
between the informality of an IOU and the rigidity of a loan contract.
Understanding Promissory Notes
Promissory notes, as well as bills of exchange, are governed by the 1930s
international convention, which also stipulates that the term "promissory
note" should be inserted in the body of the instrument and should contain
an unconditional promise to pay.
In terms of their legal enforceability, promissory notes lie somewhere
between the informality of an IOU and the rigidity of a loan contract. A
promissory note includes a specific promise to pay, and the steps required
to do so (like the repayment schedule), while an IOU merely acknowledges
that a debt exists, and the amount one party owes another.
A loan contract, on the other hand, usually states the lender's right to
recourse—such as foreclosure—in the event of default by the borrower;
such provisions are generally absent in a promissory note. While it might
make note of the consequences of non-payment or untimely payments
(such as late fees), it does not usually explain methods of recourse if the
issuer does not pay on time.
Promissory notes that are unconditional and salable become negotiable
instruments that are extensively used in business transactions in numerous
countries.
Student Loan Promissory Notes
Many people sign their first promissory notes as part of the process of
getting a student loan. Private lenders typically require students to sign
promissory notes for each separate loan that they take out. Some schools,
however, allow federal student loan borrowers to sign a one-time, master
promissory note. After that, the student borrower can receive multiple
federal student loans as long as the school certifies the student's continued
eligibility.
Student loan promissory notes outline the rights and responsibilities of
student borrowers as well as the conditions and terms of the loan. By
signing a master promissory note for federal student loans, for instance, the
student promises to repay the loan amounts plus interest and fees to the
U.S. Department of Education. The master promissory note also includes
the student's personal contact information and employment information as
well as the names and contact information for the student's personal
references.
A Brief History of Promissory Notes
Promissory notes have had an interesting history. At times, they have
circulated as a form of alternate currency, free of government control. In
some places, the official currency is in fact form of promissory note called a
demand note (one with no stated maturity date or fixed term, allowing the
lender to decide when to demand payment).
In the United States, however, promissory notes are usually issued only to
corporate clients sophisticated investors. Recently, however, promissory
notes have also been also seeing increasing use when it comes to selling
homes and securing mortgages.
 
A promissory note is usually held by the party owed money; once the debt
has been fully discharged, it must be canceled by the payee and returned
to the issuer.

Mortgages vs. Promissory Notes

Homeowners usually think of their mortgage as an obligation to repay the
money they borrowed to buy their residence. But actually, it's a promissory
note they also sign, as part of the financing process, that represents that
promise to pay back the loan, along with the repayment terms. The
promissory note stipulates the size of the debt, its interest rate, and late
fees. In this case, the lender holds the promissory note until the mortgage
loan is paid off. Unlike the deed of trust or mortgage itself, the promissory
note is not entered into in county land records.
The promissory note can also be a way in which people who don't qualify
for a mortgage can purchase a home. The mechanics of the deal,
commonly called a take-back mortgage, are quite simple: The seller
continues to hold the mortgage (taking it back) on the residence, and the
buyer signs a promissory note saying that they will pay the price of the
house plus an agreed-upon interest rate in regular installments. The
payments from the promissory note often result in positive monthly cash
flow for the seller.
Usually, the buyer will make a large down payment to bolster the seller's
confidence in the buyer's ability to make future payments. Although it varies
by situation and state, the deed of the house is often used as a form of
collateral and it reverts back to the seller if the buyer can't make the
payments. There are cases in which a third party acts as the creditor in a
take-back mortgage instead of the seller, but this can make matters more
complex and prone to legal problems in the case of default.
The Tax Perspective
From the perspective of the homeowner who wants to sell, the composition
of the promissory note is quite important. It is better, from a tax perspective,
to get a higher sales price for your home and charge the buyer a lower
interest rate. This way, the capital gains will be tax-free on the sale of the
home, but the interest on the note will be taxed.