What is correspondent lending?
Key takeaways
- Correspondent lenders originate and underwrite mortgages, financing them with their own funds.
- Mortgages originated by correspondent lenders are always sold to other financial institutions or to investors.
- Correspondent lenders often offer a greater variety of mortgages than retail banks or credit unions, and offer speedier closing times.
- However, they may charge more fees or have more stringent criteria.
When you shop for a mortgage, you will find that there are many types of mortgages and many kinds of loan providers: mortgage broker, mortgage banker, online lender and traditional banks and credit unions. Here’s another category to consider: correspondent lenders.
The difference between correspondent lenders and other types of mortgage providers is largely a behind-the-scenes one. Still, it can have an impact on your loan options. Read on to learn all about the practice of correspondent lending, and to see if a correspondent lender is the best source of a mortgage for you.
What is a correspondent lender?
A correspondent lender establishes and provides the money for mortgages. But don’t all mortgage lenders do that, you may ask?
Not necessarily. While they do overlap with other types of lenders who originate, underwrite and fund the mortgage, the key characteristic of correspondent lenders is that they don’t keep the loan for its full term, collecting interest on it over the years. Instead, their business model is structured so that they promptly sell it to an institutional mortgage buyer — often, a government-sponsored enterprise (GSE) like Fannie Mae or Freddie Mac. They make their money when the mortgage closes, earning a fee for providing it, and then again when they resell the loan — working the spread between the rate you paid for the loan and the rate when the loan is sold.
Many banks and credit unions who offer mortgages are correspondent lenders because they sell the mortgages after issuing them. Some of the biggest lenders in the business are correspondent lenders, in fact, so you might encounter them during home buying.
Where the money comes from
When you close on your loan, your lender will deliver the funds so you can complete your purchase. This can happen in several ways, depending on what sort of loan provider you’re working with:
- A retail mortgage lender puts up the mortgage money and then immediately turns around at closing and sells the loan to an investor. Sometimes, the origination of your mortgage and its sale occur simultaneously at settlement, a process called table funding.
- A direct lender with cash — perhaps a mortgage bank — funds and keeps the loan. This is known as portfolio lending.
- An investor or wholesaler funds the loan. This is typically how mortgage brokers work — they do not have the cash to fund their own loans, so they essentially act as retail outlets for direct lenders and others with cash.
- A correspondent lender originates and funds the loan, using a type of credit called a “warehouse line” to provide the money. It will subsequently pay off this line of credit after closing and selling the loan. Fannie Mae or Freddie Mac often purchase loans from correspondent lenders.
Correspondent lender vs. mortgage broker
Correspondent lenders offer many different kinds of mortgages. Depending on your financing needs, a correspondent lender could give you a loan you couldn’t get from your local bank or credit union. In this respect, correspondent lenders are similar to mortgage brokers in that they have access to a variety of loan products that conventional lenders might not offer. The difference is that a mortgage broker is strictly the middleman — they do the legwork, but they don’t furnish any funds — whereas a correspondent lender actually provides the money for the mortgage.
Correspondent lending vs. wholesale lending
Correspondent and wholesale lenders are similar in that they both sell loans on the secondary mortgage market after originating and funding them.
However, the big difference between the two is customer interaction. A wholesale lender works via a third party who communicates with the borrower, while a correspondent lender does deal directly with the borrower. Also, a correspondent lender may continue to service a loan even after the loan is sold, which a wholesale lender would not typically do.
How correspondent lending works
The practice of correspondent lending serves an important purpose of freeing up funds. Increasingly few financial institutions have the capital structure to hold onto mortgages for 30 years. Selling your loan provides a lender with funds, which they can then use to loan money (and generate fees) to other borrowers. In this way, money keeps moving throughout the financial loan system, ensuring liquidity and ready funding for all.
You can work with a correspondent lender as you would any institution. It will originate a mortgage loan, fund it, and then after the loan closes, sell it to a professional mortgage market-maker.
These buyers, in turn, bundle your mortgage together with a package of other conforming loans — a practice known as securitization — and sell this mortgage-backed security to a pension fund, insurance company or other investor in the secondary mortgage market.
Sometimes, correspondent lenders might sell your mortgage but continue to act as its servicer, including taking your payments and managing your escrow account. Correspondent lenders might also sell the mortgage to another financial institution (often one that lacks the capacity to do underwriting), who takes over the servicing duties — or sells the loan yet again on the secondary market.
Example of correspondent lending
Let’s say you want to take out an FHA loan. You find a large-outfit mortgage lender who helps you find the best rates on an FHA mortgage. During the process, the lender collects your documentation, schedules an appraisal and does all the underwriting. Throughout the process, you’ll be in direct contact with the correspondent lender. When your loan closes, the lender provides the funding, you pay the seller, and the home is yours.
A few months later, your correspondent lender sells your mortgage to another company but continues to service your loan. The lender collects and forwards your mortgage payments to the current mortgage holder. In addition, your correspondent lender will also keep your escrow account active.
Pros and cons of correspondent lenders
Buying a home is one of the biggest financial decisions of your life, and choosing a mortgage provider is an important part of that process. Correspondence lending might be a good fit for your finances, so weighing the pros and cons when comparing mortgages and mortgage providers is a good idea.
Pros
- Variety in loan types: Correspondence lenders could have dozens of relationships with potential funding sources, offering options you wouldn’t get if you were going through your local bank or credit union, whose types of mortgages available might be limited.
- Communication with the lender: Unlike with a mortgage broker, you deal directly with the entity funding your loan and setting the guidelines. They can help you navigate the requirements and options and perhaps tailor certain qualifications for your particular case.
- Faster path to closing: Since the underwriting and approval process is all in-house, finalizing the loan and your home purchase may be quicker and smoother with a correspondent lender.
Cons
- Paying more in fees: Some correspondent lenders can charge additional fees on top of usual costs, like an origination fee and an appraisal fee. Be aware of this possibility and ask to see an itemized breakdown of all your costs before choosing a loan.
- Exacting underwriting policies: Correspondent lenders have to meet the specific standards (such as loan size, terms and basic borrower creditworthiness) set by the investors to which they sell mortgages after closing. These requirements could be too stringent for borrowers who don’t fit conventional financial or qualification profiles.
- Servicer switch: The lender will sell your mortgage, and it may sell the servicing rights along with them. That could be frustrating if you had a good experience working with this lender, as you’ll now have to deal with another entity. (Definitely a question to ask when you apply.)
Other types of mortgage lenders
- Direct lenders
- A direct lender — such as a bank, credit union or insurance company – uses its own money to fund mortgages it originates. It generally can set its own standards, especially if it doesn’t plan to sell your mortgage on the secondary market.
- Mortgage bankers
- A mortgage bank can be a retail or a direct lender such as a bank, credit union or digital lender. These companies either have their own cash to fund mortgages, or borrow the money via warehouse lines of credit. They may keep the loans or they may sell the mortgages to entities like Fannie Mae and Freddie Mac.
- Mortgage brokers
- A mortgage broker effectively functions as a middleman connecting investors or operators of other financing pools and borrowers. They don’t directly fund or originate mortgages. Loans made through mortgage brokers must meet the requirements established by the cash source.
- Portfolio lenders
- A portfolio lender can be a direct lender, retail lender or wholesale lender. Portfolio lenders generally hold onto the loans they originate rather than securitizing and selling them. Because portfolio lenders keep mortgages as assets on their own books, the requirements for portfolio loans are not necessarily the same as typical mortgage products. As a borrower, you can sometimes find better financing options with a portfolio lender even if you don’t quite meet usual underwriting standards.
- Wholesale lenders
- A wholesale lender doesn’t do business with consumers. Instead, this mortgage provider sets underwriting standards and provides the loan money to retail lenders or mortgage brokers, who work with borrowers directly.
Correspondent lending FAQs
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The types of mortgages provided by correspondent lenders can be used to purchase many of the same types of properties as with other types of mortgage lenders including single-family homes, condominiums and investment properties.
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Pretty much the same way you’d identify any sort of reputable lender. Check for their licensing and accreditation — both the institution overall and any individual loan officer you deal with.The lender should be completely clear and transparent in its dealings and communications. It won’t necessarily volunteer that it’s a correspondent lender, but it shouldn’t hide the fact if you ask, either. It should indicate if it will continue to act as your loan servicer after the mortgage closes.Next, compare your impression to those of customer testimonials. Many online lender reviews, including Bankrate’s, feature client comments.
