The term "mortgage lenders" was used in the past to refer to the organization that originated the actual funding for a home mortgage. However, the term has changed with the times, resulting in more innovative financial tools for the homebuyer. Simultaneously, the increase in choices has also contributed to greater confusion.

Mortgage lenders are a very diverse group. The key players are: mortgage bankers, portfolio lenders, and direct lenders. In order to ascertain which is the best option, you must understand the responsibilities of each of these three mortgage lenders.

A Mortgage Banker Explained

A mortgage banker is an organization that arranges home mortgages merely for the purpose of on-selling those mortgages in the secondary mortgage market. There are a handful of mortgage bankers that have close relationships and associations with companies that provide the actual loan funding.

However, the on-selling of the mortgage by the mortgage banker does not mean that the borrower ceases their relationship with their lender; in fact, many mortgage bankers continue to service the loans which they have arranged, even after the sale.

The Definition of a Direct Lender

A direct lender is a type of mortgage lender who attaches his or her own name to the mortgage, even if the funding for that lending amount came from funds that were sourced from lines of credit or established with several other lending institutions. For example, some mortgage brokers are offering mortgage loans in their own name because they have established lines of credit with other lending institutions.

Some people in the mortgage industry do not agree with brokers acting as lenders. This is because the direct lender is entering into the mortgage sales contract, extemporaneously, with the home buyer's contract; consequently, the direct lender is not risking any of their own capital. The lending institution who actually funds the loan will be at risk if the borrower defaults on the loan.

What is a Portfolio Lender?

A portfolio lender is a financial organization that lends the funds for the amount of the home loan itself. The portfolio lender will then retain, instead of selling, some or all of these mortgages for the sole purpose of having an investment in the portfolio. A portfolio lender, at times, can also be a mortgage banker. This occurs when the portfolio lender sells some of its mortgage portfolio on the open secondary market. A portfolio lender will continue to service all of the loans that they originate.

How Do I Decide Between the Three Lenders?

Your financial situation and loan requirements will help you to decide which lender is right for you. If you want a more traditional loan, you should consider obtaining a home loan from a mortgage banker or a portfolio lender. A direct lender is a more unconventional, and he or she sometimes has higher interest rates because of the risk to the outsourced lender.