A real estate lender can either be a private or public institution or an individual[1]. However, regardless of the type of entity, they finance the purchase of real property by issuing a loan to a buyer[2]. These loans often take the form of mortgages.

Most real estate lenders in the U.S. are mortgage bankers, which are further classified into these two categories[3]:

• Retail lenders. Retail lenders, such as banks and credit unions, issue mortgages directly to consumers. To fund their mortgage issuance, they borrow money at short-term rates from warehouse lenders through a line of credit[4]. Shortly after closing a loan, the retail lenders bundle it with similar real estate loans and sell them to the secondary mortgage market.
• Direct lenders. A direct lender originates a loan using its own funds or borrowing from another financial institution. This lender specializes in mortgages, and with this niche focus, its qualifying guidelines tend to be more flexible than retail lenders.

Both are part of the primary mortgage market, where borrowers obtain financing for property purchases from banks, credit unions, and other lenders.

Secondary Mortgage Lenders

The existence of a primary mortgage market also implies a secondary market.

The secondary mortgage market is where the primary mortgage lenders “sell” their loans and associated servicing rights to investors[5]. Doing so allows primary mortgage lenders to recoup their money after it has been taken out on a loan. Meanwhile, investors who buy loans (in the form of mortgage-backed securities) earn income when the primary mortgage borrowers repay their mortgages.

Besides sales of MBSs, secondary mortgage lenders also fund their loans through sales of long-term notes, debentures, and common stock.

The federal government initiated the secondary mortgage market to help promote American homeownership[6]. Fannie Mae was created in 1938 (and later Freddie Mac) to expand the secondary mortgage market as part of FDR’s New Deal. Today, they hold over half of the outstanding mortgage debt in the country combined.

Fannie Mae’s former headquarters at in Washington, D.C. Source: Wikipedia

The secondary mortgage market is also instrumental to the regulation of credit guidelines and home buying[7]. These lending standards contribute to the overall health of the real estate industry.

Finally, secondary mortgage lenders allow real estate funding to reach otherwise remote areas. This circulation of home loan funds helps prevent the imbalance of mortgages only available in certain regions or states.

Alongside the primary mortgage market, the entire mortgage sector involves other types of real estate industry players. These include:

Mortgage Brokers

They are the intermediaries between mortgage borrowers and direct or retail lenders. A mortgage broker, for a fee, helps borrowers comparison-shop from their network of lenders. They assist the borrowers in qualifying for a loan, especially in the documentation process[8].

Warehouse Lenders

Warehouse lenders do not interact directly with consumers. Instead, they provide short-term funding through a line of credit to mortgages issued by direct and retail real estate lenders. Usually, this credit line is repaid once the loan involved is sold on the secondary market. Warehouse lenders hold the mortgages as collateral until their borrowers (retail or direct lenders) repay the loan.

Wholesale Lenders

Banks or other financial institutions offering loans through third parties, like mortgage brokers, credit unions, or other banks are called wholesale lenders. These lenders do not work directly with consumers, but they originate, fund, and sometimes service loans. Many mortgage banks run both wholesale and retail real estate mortgage operations. Shortly after closing a loan, mortgage lenders sell it to the secondary market.

Portfolio Lenders

These lenders use their own money to fund borrowers’ loans and set their own borrowing terms and guidelines. As a result, some borrowers, such as those investing in a property, may find more flexibility in dealing with a portfolio lender.

Correspondent Lenders

Correspondents are the initial lenders making the loan, and they might even service the mortgage. However, correspondents typically sell the mortgages on the secondary market. If a loan is unsold, a correspondent lender must hold it or look for another secondary market investor.

Hard Money Lenders

These are usually private individuals or companies with significant cash reserves but charge higher interest in exchange for absorbing greater risk. Home flippers and borrowers unable to tap portfolio lenders may ask for a hard money loan, which is so-called because it is backed with a hard asset like real estate.

Private Mortgage Lenders

These lenders are typically the borrowers’ relatives or friends, but they can also be businesses or organizations. Borrowers who cannot obtain a mortgage via traditional funding channels[9] may turn to private money for capital.

FHA-Approved Lenders

The Federal Housing Administration (FHA), a government agency promoting homeownership among low-income American families, insures the mortgages issued by FHA-approved lenders. In turn, to become an FHA-approved lender, a lender must meet specific criteria, such as being a corporation or a partnership[10]

Borrowers who qualify for an FHA loan are mostly low- to moderate-income individuals and families, particularly first-time home buyers, due to the possibility of paying a low down payment[11].

BY THE NUMBERS: U.S. real estate borrowers and lenders count on the services of over 23,000 mortgage brokers.

Source: Zippia

• A real estate lender is an individual or institution that finances a real estate transaction, usually by issuing a loan to a buyer.
• Most lenders who face consumers are part of the primary mortgage market. The secondary mortgage market is where primary lenders discharge and sell their loans to investors to recoup the money they lent out to borrowers.
• Other real estate lenders are available, depending on the borrower’s profile and circumstances. Some, including hard money lenders, are for borrowers who present great risk, while others, like FHA-approved lenders, are for low-income families who want to buy their first home.

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3. Kearns, D. (2021.) What Are the Main Types of Mortgage Lenders? Investopedia. Retrieved from https://www.investopedia.com/mortgage/mortgage-guide/mortgage-lenders/
4. Marticio, D (2021.) What Is Warehouse Lending? The Balance. Retrieved from https://www.thebalance.com/what-is-warehouse-lending-5207388
5. Quicken Loans. (n.d.) What Is the Secondary Mortgage Market? Retrieved from https://www.quickenloans.com/learn/secondary-mortgage-market
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9. Pritchard, J. (2021.) Pros and Cons of Private Mortgage Lenders. The Balance. Retrieved from https://www.thebalance.com/private-mortgage-how-to-do-it-what-to-watch-for-315693
10. Metz CPA. (n.d.) Requirements to Be FHA Approved. Retrieved from https://www.metzcpa.com/FHAapproval.php
11. Bundrick, H. (2019.) FHA Loan Down Payments. NerdWallet. Retrieved from https://www.nerdwallet.com/article/mortgages/fha-loans-low-down-payment