A lender is an individual, institution or government entity that loans money to another party. The cash advance is expected to be repaid with interest, but the repayment terms depend on the circumstances. Learn about lenders, the lending process and how to find the best loan.

Thomas Brock, CFA, CPA, expert contributor to Annuity.org
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APA Brock, T. J. (2022, August 1). Lender. Annuity.org. Retrieved August 18, 2022, from https://www.annuity.org/real-estate/buying/lenders/

MLA Brock, Thomas J. "Lender." Annuity.org, 1 Aug 2022, https://www.annuity.org/real-estate/buying/lenders/.

Chicago Brock, Thomas J. "Lender." Annuity.org. Last modified August 1, 2022. https://www.annuity.org/real-estate/buying/lenders/.

What Is a Lender?

A lender is an individual, group or institution that provides money to a borrower for a specified period of time. By the end of the period, the money is expected to be returned to the lender, along with compensation for use of the funds. The compensation, which is referred to as interest, usually takes the form of periodic cash payments.

The detailed terms of a financing arrangement are specified in a loan agreement. Generally, it outlines the maturity date of the loan, the interest rate, the loan repayment schedule, non-interest charges and fees, any pledged collateral, and pertinent performance expectations and covenants.

Many people view the terms lender and creditor as synonymous. However, while all lenders are creditors, not all creditors are lenders. A creditor is owed money, whereas a lender lends money.

Types of Lenders

Lenders come in many forms. At the highest level, they include individuals, institutions and government entities. Most individual lenders operate on an informal basis, extending financial support to family members and friends. Some embrace a higher degree formality and leverage peer-to-peer lending platforms.

Institutional and governmental lenders are more complex than individual financiers. As outlined below, they come in many shapes and sizes.

Commercial banks
Financial institutions that provide individuals and businesses a means to safekeep money and facilitate payments and transfers. Banks also provide their customers access to a variety of loans, including home mortgages, auto loans, credit cards and other forms of revolving credit. Generally, the more extensive your relationship with a bank, the more likely you are to have access to perks, discounts and special offers.
Credit unions
Non-profit organizations that exist to serve their members. They operate much like commercial banks, but usually do not offer as many types of loans and do not have as much lending capacity. However, the interest rates and terms offered on their loans are generally superior.
Non-bank lenders
Financiers that compete with banks and credit unions, but they do so entirely online. The elimination of brick-and-mortar overhead costs enables these lenders to offer very competitive rates and terms. The largest of these companies focus on mortgages, but many offer student and personal loans.
Peer-to-peer lending platforms
Online forums that connect borrowers to individuals and/or businesses looking to loan money. Thanks to the expansive reach of social media, these platforms have become increasingly commonplace in recent years. Obtaining money through them is usually easy; however, this comes with the tradeoff of relatively high interest rates. In some cases, the rates are excessive.
Government-related lenders
U.S. government agencies and government-sponsored entities that facilitate debt financing for individuals and small businesses. Some government agencies directly lend to borrowers, but most provide financial support indirectly by guaranteeing the loans of approved lenders. Government-sponsored entities provide financial support indirectly by guaranteeing the loans of approved lenders.

In addition to the list above, there are alternative lenders that provide relatively small loans with very short terms, such as payday lenders and title lenders.

Payday lenders front money and recoup repayment from your upcoming paycheck. Title lenders front money and collateralize the loan by taking title to an asset, such as your car. You should only use these types of financiers in extreme emergencies as they tend to charge high interest rates.

What Is a Mortgage Lender?

A mortgage lender is a financial institution that originates and underwrites loans for homebuyers and people looking to refinance mortgages. Mortgage lenders evaluate the creditworthiness of each borrower, along with the economic value of the home he or she hopes to pledge as collateral. The lender to set the terms and, ultimately, lend the necessary funds to the borrower.

Mortgage loans are, by far, the largest category of debt in the United States among individuals. Totaling $10.4 trillion, they account for approximately 70% of total household debt.

A variety of financial institutions, intermediaries and government-sponsored entities support this massive market. Understanding them is important, especially for individuals looking to buy real estate or refinance an existing mortgage. With interest rates on the rise in 2022, the number of people looking to do either is shrinking. Nevertheless, it’s never a bad time to educate yourself on the mortgage market

Mortgage Lenders vs. Mortgage Brokers

When shopping for a mortgage, you’re likely to encounter various banks, credit unions and non-bank lenders offering varying term lengths, interest rates and special features. The differences can equate to thousands of dollars over the life of a loan. So, it’s smart to carefully compare them.

Brokers charge a fee for their service, which is paid by either the borrower or the lender. Generally, the fee is a small percentage of the loan amount (1% to 2%). When incurred by the borrower, it can be either added to the loan or paid upfront.

If you need help comparing lenders, then a mortgage broker can assist. A broker is a licensed intermediary that connects you to potential lenders. They can facilitate the search and evaluation effort and select the best possible mortgage offers for you. They can also assist with the preparation of mortgage applications and provide advice on how to improve your creditworthiness.

Types of Mortgage Lenders

As noted above, mortgage lenders largely consist of banks, credit unions and non-bank lenders — but this does not encompass the diversity of the mortgage market. The outline below offers some clarity on the various, sometimes overlapping, types of mortgage lenders.

Retail lenders
Provides mortgages directly to consumers. This category consists of banks, credit unions and mortgage bankers. Generally, this group is not focused purely on the mortgage market. Rather, they offer additional products and services to their customers.
Direct lenders
Originate loans, either with their own funds or by borrowing them elsewhere. Unlike retail lenders, direct lenders specialize in mortgages.
Wholesale lenders
Financial institutions that offer loans through third parties, such as mortgage brokers and other financial institutions. They don’t work directly with consumers, but they do originate and fund their loans; some also service them. Most of the loans originated by these lenders are sold on the secondary market to government-sponsored entities and private investors.
Mortgage bankers
This category consists of banks, credit unions and nonbank lenders that borrow money from short-term financiers, known as warehouse lenders, to fund their mortgages. Shortly after issuance, the mortgages are sold on the secondary market. Then, the short-term debt is repaid.
Correspondent lenders
This type is similar to mortgage bankers, but they provide mortgages directly to consumers, as well as through mortgage brokers. The loans they originate are sold to investors in the secondary market, but many are serviced post-sale.
Hard money lenders
Typically, private companies or high-net-worth individuals that offer short-term financing to house flippers. This financing channel is appropriate for experienced real estate investors, but most homebuyers are better off with traditional mortgage lenders.

Finding a Lender

Now that we’ve covered the various types of mortgage lenders, let’s take a few minutes to discuss the most important things to consider when shopping for a loan. For starters, you should take time to assess the trustworthiness and stability of all lenders on your radar. You should only apply for loans with reputable lenders that have established track records and favorable customer reviews.

Ideally, you should apply with at least three or four distinct lenders. It’s a good idea to include at least one traditional lender and one nonbank lender in your field of contenders. Infusing some diversity into the selection process will improve your chances of finding an optimal solution.

Following the approval of your applications, you need to compare the offers and decide which one makes the most sense for you. Be sure to carefully consider the following five metrics.

5 Metrics to Consider When Comparing Offers

  1. Interest rate

    This is the figure that expresses the baseline amount charged for a loan. Typically, it is stated as a percentage of the loan and expressed on an annual basis. The higher the rate, the more money you’ll be required to pay over the life of the loan.

  2. Origination, underwriting and application fees

    The assortment of fees a lender charges for their services. They represent all the administrative work that goes into structuring and executing a loan.

  3. The annual percentage rate (APR)

    A metric that combines the interest rate and the origination, underwriting and application fees. It is the optimal metric to assess the annualized, all-in cost of a loan.

  4. Funds to close

    A term that describes the total amount of money you’ll be required to provide to the lender on closing day. It reflects a variety of things, including the down payment and closing costs for the loan. Some arrangements also call for property-related fees, such as inspections fees, property taxes and mortgage insurance premiums.

  5. The prepayment penalty

    The fee some lenders charge if you pay off a loan early. Generally, you should avoid lenders that levy this charge, but this isn’t a hard-and-fast rule.

The costs associated with a loan can vary greatly from one lender to the next. It’s important to maintain a holistic perspective as you determine most economical quotes. Doing so can save you a ton of money.

What To Look For in a Loan

When shopping for a loan, be aware of the lenders’ perspectives. Knowing what they look at and how it impacts the underwriting process can help you set realistic expectations and adjust your personal situation to achieve a more favorable outcome.

Every lender has its own set of criteria for evaluating whether you qualify for a loan and what terms should be offered to qualifying applicants. Regardless of the underwriting protocols, all lenders are chiefly concerned with one thing – the likelihood that you’ll repay the loan according to its terms.

To gain assurance, most lenders focus on your credit score, your income, your outstanding debts, the amount of money you seek, the length of the loan and any assets you pledge as collateral. Generally, the following ideas hold true:

  • The best loan offers are associated with excellent credit scores, stable income streams and low levels of debt outstanding. Each factor acts as a lever and can favorably or unfavorably impact the terms of a loan.
  • The higher the loan amount sought, the higher the interest rate offered. The lower the loan amount sought, the lower the interest rate offered.
  • The longer the loan term, the higher the interest rate. The shorter the term, the lower the interest rate.
  • Regarding collateral, secured loans carry much lower interest rates than unsecured loans.

Keep these ideas in mind the next time you’re in the market for a mortgage.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 1, 2022

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