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If you’re a homebuyer searching for a mortgage, there are a lot of lender options out there: mortgage broker, mortgage banker, online lender and of course traditional banks and credit unions. Here’s another category to consider: correspondent lenders.
Correspondent lending refers to a now-common process in the mortgage industry: A financial institution originates and supplies the money for a mortgage, which it then sells — usually to an institutional investor, which bundles it with others and resells it on the secondary mortgage market.
Yes, much of this is behind-the-scenes stuff that doesn’t directly affect individual borrowers. Still, it can be useful to understand correspondent lending and the benefits of getting a mortgage from a correspondent lender. Among other things, it can affect your loan options.
Read on to learn all about the practice, and to see if a correspondent lender is the best mortgage lender for you.
What is a correspondent lender?
A correspondent lender originates and underwrites mortgages, then sells them to another financial institution or investor. But don’t all lenders do that, you may ask?
Not necessarily. Correspondent lenders do overlap with other types of lenders. The key defining characteristic of correspondent lenders is that while they originate, underwrite and fund the mortgage, their business model is structured so that they then sell it to an institutional mortgage buyer — often, a government-sponsored enterprise (GSE) like Fannie Mae or Freddie Mac. (In fact, the lender writes the loan using the underwriting standards and guidelines set by the institutional investor they are selling to.) These buyers, in turn, bundle your mortgage together with a package of other conforming loans — a practice known as securitization — in order to sell it 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.
Keep in mind: Correspondent lenders offer many different kinds of mortgages. They make their money when the mortgage closes and they earn a fee, and of course when they resell the loan — working the spread between the rate you paid for the loan and the rate when the loan is sold.
The practice of correspondent lending might seem like an added complexity to the already complicated mortgage market, but it serves an important purpose of freeing up funds. Few financial institutions have the capital structure to hold onto mortgages for 30 years. Selling your loan provides them 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 its liquidity and ready funding for all.
Correspondent lender vs mortgage broker
Depending on your financing needs, a correspondent lender might be able to give you access to a loan that you couldn’t get from your local bank branch or credit union. In this respect, correspondent lenders are similar to mortgage brokers in that they have access to a wide array of loan products that conventional lenders might not offer. The key difference is that a mortgage broker is strictly the middleman — they do the legwork, but they don’t contribute the money — whereas a correspondent lender actually backs your mortgage with its own funds.
How correspondent lending works
When you shop for a mortgage, you will find that there are numerous different types of mortgages offered by companies with different rules, rates and structures. You can work with a retail lender, such as a bank or credit union, or you can choose to work with a mortgage broker or correspondent lender (a broker might wind up connecting you with one).
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 take place simultaneously at settlement, a process called table funding.
- A direct lender with cash — perhaps a mortgage bank — funds the loan and keeps it. This is known as portfolio lending.
- An investor or wholesaler funds the loan. This is typically how mortgage brokers work — they do not have 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.
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 personal finances, so it’s a good idea to weigh the pros and cons when comparing mortgages and mortgage providers.
- 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, where the types of mortgages available might be limited.
- Communication with the lender: Unlike with a mortgage broker, you’re dealing 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.
- 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 it sells mortgages after closing. These requirements could be too stringent for borrowers who don’t fit conventional financial or qualification profiles.
Alternatives to correspondent lenders
Here are some other types of mortgage lenders.
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 agencies 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. The distinction is that portfolio lenders generally hold onto the loans they originate rather than securitizing them and selling them either to government agencies or private-sector investment groups. 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 category of mortgage provider sets underwriting standards and provides the loan money to retail lenders or mortgage brokers, who work with borrowers directly.
If some of these types seem to overlap — well, they do. There is a lot of crossover in the mortgage business: A bank, credit union or mortgage banker might act in some situations as a correspondent lender by selling mortgages they originate to or through other lenders.
How to find the best mortgage lender
- Check your credit report. The higher your credit score, the better mortgage rate you can expect to get. Checking your credit before you start mortgage shopping gives you an opportunity to correct any factual errors or out-of-date items. You can access a free credit report once per year from each of the big three credit bureaus — Experian, Equifax and TransUnion — at AnnualCreditReport.com. Ideally, you should clean up your report at least six months in advance of serious hunting.
- Compare APRs and fees. Even though mortgage rates have climbed considerably over the past year, the mortgage business remains very competitive. But you have to read the fine print. If you see a rate that seems too good to be true, it’s possible that you’ll be paying higher fees or will be subject to loan terms that might not be a good fit for your needs.
- Get preapproved. It pays to speak with a number of lenders, and getting preapproved will give you a good sense of how much money you’re qualified to borrow. Especially in competitive housing markets, preapproval will help you speed up the homebuying process and make you a more attractive buyer to the seller. Knowing how much you can borrow also helps you set your budget as you’re house-hunting.