What is a correspondent lender?
Imagine someone sends you a birthday card. Both you and the sender are correspondents in communication with one another. In the mortgage world, the lender you know and the buyer or investor who purchases your loan are also in communication with one another. Both can be seen as correspondent lenders.
You might think of a correspondent lender as a mortgage broker, mortgage banker, online lender or direct lender such as a bank, credit union or insurance company. Since each have the ability to provide mortgages, they might seem similar, but behind the scenes, they also have the ability to engage in correspondent transactions, such as selling your loan to a buyer like Fannie Mae, Freddie Mac, Ginnie Mae, a pension fund, insurance company or other investor in the secondary mortgage market.
How correspondent lending works
Let’s explore what would happen in a correspondent transaction if you were looking for a $300,000 mortgage.
Say you shop around and speak with a number of retail lenders. These are lenders who work directly with the public. You could have found them online or through a friend’s recommendation or an advertisement, or one might have been the source of your last mortgage.
While borrowers see a $300,000 mortgage as debt, lenders see the same mortgage as a $300,000 asset that can be sold. Here’s an interesting fact: The retail lender usually does not want to keep your $300,000 loan. Why? The lender has limited capital, or no capital, and wants to originate more loans. By selling the loan, your retail lender now recoups its $300,000, and with new capital, it can make additional loans that generate new fees and charges. (In many cases, the origination of your mortgage and its sale take place simultaneously at settlement, a process called table funding.)
We can now take the basic retail model and turn it around. Instead of a retail lender who needs capital, there might be a mortgage investor that needs more loans. The investor, sometimes called a wholesaler, can say, “I have $10 million. I will buy loans from approved lenders if they meet certain standards.”
These standards might be FHA or VA standards, or conforming standards, mortgages that meet Fannie Mae and Freddie Mac requirements. Sometimes, investors will want nonconforming loans such as jumbo mortgages. Whatever the case, the retail lender must meet the investor’s requirements. This is one reason why lenders are so careful with borrower information, why they ask so many questions and want so much documentation.
Who funds a correspondent mortgage?
When you go to closing, your lender delivers the promised funds. This can happen in several ways:
- The retail lender puts up the mortgage money and then immediately turns around at closing and sells the loan to an investor. This is often how mortgage bankers and direct lenders work.
- The 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 direct lender with cash — perhaps a bank — funds the loan and keeps it. This is known as portfolio lending.
Correspondent lending pros and cons
The big advantage with correspondent lending is that an individual retail lender can offer a wide variety of mortgages. This gives the lender the best opportunity to fully match your needs with the mortgage options that are out there, but perhaps unknown to other lenders. A correspondent lender could have dozens of relationships with potential loan sources.
These sources offer loans that are often different in one way or another from what other sources provide. For instance, one wholesaler could allow a borrower to have a 50 percent debt-to-income (DTI) ratio, while another will only go as high as 47 percent. A correspondent lender searches through wholesaler guidelines to find the mortgage source most likely to accept you as a borrower.
In theory, though, a direct lender such as a bank, credit union or mortgage banker can only sell the loan products it wants to fund. This appears to be a negative, because it suggests that mortgage options from a direct lender are limited. However, there’s a lot of crossover in the mortgage business. A bank, mortgage banker or credit union might act as a correspondent lender by selling the mortgage products of other direct lenders.
Other types of mortgage lenders
- Direct lenders – A direct lender has the cash to fund your mortgage, such as a bank, credit union or insurance company. Because a direct lender has money, it can determine whether you qualify for financing on the basis of its own standards.
- Mortgage bankers – Mortgage bankers have the cash necessary to fund the loans they originate. They can originate loans on their own and sell them to investors, or they can originate loans that are funded by a third party.
- Mortgage brokers – Not every retail lender has the money to finance your mortgage. A mortgage broker represents investors and other loan sources who supply the cash. The loan must meet the requirements established by the cash source.
- Portfolio lenders – A direct lender can keep your loan or sell it in the secondary market or directly to an investor. If a lender keeps your loan, it’s a “portfolio” lender because your loan becomes an asset on its books. The requirements for portfolio loans are not necessarily the same as typical mortgage products because the portfolio lender is not reselling the debt, so it can sometimes offer better financing options for borrowers who don’t quite meet usual underwriting standards.
- Wholesale lenders – As the borrower, you don’t actually do business directly with a wholesaler. Wholesale lenders provide cash to retail lenders. They set the underwriting guidelines and either fund the loan at closing or buy the loan from retailers.
How to find the best mortgage lender
- Check your credit reports. A high credit score generally means a lower mortgage rate. Check your credit reports to ensure there are no factual errors or out-of-date items. Here’s some good news: You can now check your credit scores weekly without cost through April 20, 2022, at AnnualCreditReport.com.
- Compare APRs and fees. The mortgage business is very competitive. If you see interest rates that seem especially low, check the fine print for fees and charges. They’re a real cost, regardless of what they’re called.
- Get preapproved. It pays to speak with a number of lenders. You want to know about rates and terms, but you also want to know if you can realistically qualify for a given loan amount. Get preapproved by one or more lenders to see how much you can borrow. Be sure to work with loan officers who ask for your tax records and other financial information so that you get a realistic assessment of what you’d qualify for.