When it comes to the mortgage industry, there are a lot of different players: direct lenders, mortgage brokers, bankers, private mortgage lenders, and more. With so many different types of lenders, it can be confusing to know which one is what.
Similar to how I previously covered the difference between the real estate brokers vs. agents vs. realtors, here I’ll break down the difference between direct lenders, mortgage brokers, and bankers. I’ll also briefly touch on what the following are and how they differ:
- Private mortgage lender
- Mortgage broker
- Credit union
- Retail lender
- Portfolio lender
- Loan officer
- Loan originator
What Are the 4 Types of Mortgage Lenders?
The four types of mortgage lenders are 1) banks (mortgage bankers), 2) credit unions, 3) mortgage lenders, and 4) mortgage brokers. If you’re confused about the difference between the four, don’t worry – we’ll explain it all.
Here’s a brief overview of each type of mortgage lender:
- Banks or Mortgage Bankers: Banks and mortgage bankers are financial institutions that lend money to borrowers to finance mainly the purchase of a home. Banks typically have stricter lending requirements than other types of lenders, so it may be harder to qualify for a loan from a bank. Having said that, if you do qualify, you may get a lower interest rate than what you’ll get from other types of lenders like mortgage brokers.
- Credit Unions: Credit unions are not-for-profit organizations that offer financial products and services to their members. Credit unions typically have lower interest rates and fees than banks.
- Mortgage Lenders: Mortgage lenders are companies that specialize in lending money to borrowers to finance purchases like a home. Mortgage lenders can be either direct lenders or retail lenders, and are also known as “private mortgage lenders”.
- Mortgage Brokers: These are the middlemen who connect borrowers with lenders. They simply connect people and don’t use their own funds to originate mortgages.
There are some other types of mortgage lenders too that we’ve skipped. You can read about them here.
What Are the 3 Different Types of Mortgage Loan Originators?
The three types of mortgage loan originators are mortgage brokers, mortgage bankers, and retail banks.
Loan origination is the process of applying for a loan, getting it approved, and disbursing the funds. This could be done through either of the three options stated above.
- Mortgage Brokers typically have a large network of lenders they work with, and can shop around for the best rates and terms on behalf of the borrower.
- Mortgage Bankers, on the other hand, are typically state-licensed direct lenders that specialize in originating mortgages directly to consumers.
- Retail Banks are the traditional brick-and-mortar banks you typically think of when you think of a bank. These banks typically have the widest variety of loan products and terms, but they also typically have the strictest lending requirements.
What’s the Difference Between a Loan Officer and a Loan Originator?
Loan originator is the umbrella term that includes loan officers and mortgage brokers. A loan originator is anyone who takes a mortgage loan application, goes through the mortgage process, and disburses the funds.
A loan officer is a type of loan originator who works for a bank or other financial institution and can offer customers products from that particular institution.
So, a loan originator in a bank can also be referred to as a loan officer.
What Is a Direct Lender?
A direct lender is a financial institution that offers loans directly to consumers. That means that you work with the lender directly, rather than going through a third-party.
A direct lender is an overarching term that covers many different types of home loan lenders, including retail lenders or a portfolio lender. Retail lenders are banks or credit unions that offer loans to their customers. A portfolio lender is a lender that originates mortgage loans and then keeps them in their own portfolio instead of selling them on the secondary market.
Peer-to-peer lending platforms such as the Funding Circle are also a type of direct lending. These platforms connect borrowers with investors who are willing to fund their loan.
Pros and Cons of Working With a Direct Lender
Here are some pros and cons of getting your mortgage financing through a direct lender:
- Eliminates the need for third-parties: When you work with a direct lender, there’s no need for a middleman. That means the loan process is simpler and faster since you’re dealing with only one party. You also have a much easier job securing a bank statement mortgage if you need one.
- You may get a better deal: Some direct lenders offer exclusive deals and mortgage rates to borrowers who work directly with them.
- Saves you money: Because there’s no middleman, working with a direct lender can save you money on fees.
- Time consuming: The processing time for mortgage application is longer since you have to apply with each lender individually
- Comparing rates can be difficult: It can be tough to compare rates from different direct lenders since each lender has their own process and requirements.
- Low approval rates: Direct lenders typically have stricter lending terms, which can mean a lower approval rate.
What Is the Difference Between a Direct Lender and a Bank?
The only difference between a direct lender and a bank is that a bank is a type of direct lender. Whereas a direct lender is simply a financial institution that lends money directly to borrowers to finance a purchase, a bank is a specific type of lender that is federally regulated in very detailed way.
What Is a Mortgage Broker?
A mortgage broker is a type of loan originator that connects borrowers with lenders. A mortgage broker doesn’t use their own funds to originate loans — they simply act as a middleman between the borrower and the lender.
Pros and Cons of Working With a Mortgage Broker
Pros and cons of getting your mortgage financing through a mortgage broker include:
- Wider range of lenders: These professionals typically have access to a wider range of lenders, and some shopping around can help you find the best deal.
- More personalized service: Brokers can provide a more personalized service since they’re not beholden to any one lender. They can give you impartial advice and help you find the best mortgage rates.
- Convenient: Applying for a mortgage through a broker can be more convenient since you have to deal with only one person instead of multiple lenders.
- Better interest rate: Bankers can offer better interest rates since they’re not beholden to any one lender.
- Costs more sometimes: Brokers typically charge a fee for their services, which can add to the cost of your loan.
- Less control: You may have less control over the process since you’re working with a third-party.
- No access to some lenders: Some lenders only work with borrowers who come to them directly, which means you may not have access to all the best lenders if you use a broker.
What Is the Difference Between a Mortgage Banker and Mortgage Broker?
The difference between a mortgage banker and mortgage broker is that a banker originates loans directly to consumers, while a mortgage broker connects borrowers with lenders.
Mortgage bankers use the bank funds to finance the loans they originate. This way they earn money through the interest paid on the loan. Brokers do not typically use their own funds to finance loans. Instead, they earn money by charging origination fees and/or collecting yield spread premiums.
What’s the Difference Between a Loan Officer and a Mortgage Broker?
The difference between a loan officer and a mortgage broker is that a loan officer works for a bank or other financial institution and can offer customers products from that particular institution, while a broker is an intermediary who connects borrowers with lenders.
In other words, brokers work with multiple lenders and can offer borrowers a wider range of products while loan officers can offer products only from their employer.
What Are Mortgage Bankers?
Mortgage bankers are financial institutions that originate, process, and fund mortgages. They use their own funds to finance loans. This way, they earn money through the interest paid on the loan. If you are getting a home equity loan for debt consolidation, then you’ll likely want to work with a mortgage banker.
Pros and Cons of Working With a Mortgage Banker
Here are some of the pros and cons of getting your mortgage financing through a mortgage banker.
- In-house underwriting: Bankers typically have in-house underwriting, which can speed up the loan application process.
- Focus on mortgages: Bankers have more experience with mortgages and loan programs, which can make for a smoother process.
- Stricter lending standards: Bankers typically have stricter lending standards.
- May not service your mortgage: Bankers typically sell the loans they originate to other financial institutions. This means you may not work with the same institution throughout the life of your loan.
What Is the Difference Between a Bank and Credit Union?
The key difference between a bank and credit union is that banks are for-profit institutions while credit unions are nonprofit. This means that banks aim to make money for their shareholders, while credit unions aim to serve their members.
Banks typically have more products and services, as well as more branches and ATMs. Credit unions typically have lower fees and interest rates, but also lesser products and services.
What Is the Difference Between a Banker and a Broker?
The difference between a banker and a broker is that a banker works for a bank and can offer customers products from the bank, while a broker is an independent middleman who connects borrowers with lenders.
Direct lender vs Mortgage broker vs Loan Officer
A direct lender is any financial institution that offers loans to borrowers directly. Examples of direct lenders include banks, credit unions, and mortgage companies. All types of officers or bankers can help you learn how much your home will be worth and how much money you need to buy a home (or how much you can refi).
By this definition, a mortgage banker is also a direct lender that specializes in originating, processing, and funding mortgages. They use their own funds to finance loans. This way, they earn money through the interest paid on the loan.
A mortgage broker, on the other hand, is an intermediary (not a direct lender) who connects borrowers with lenders. They do not use their own funds to finance loans. Instead, they earn money by charging origination fees and/or collecting yield spread premiums.
Now that you know the difference between each loan provider, choose wisely. If you’re a first-time home buyer, it is important to know your options before proceeding with the mortgage application. Doing this helps save time and money. If you’re unsure what steps to take, our mortgage guide for first time homebuyers can help.