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Key takeout
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The correspondent lender originates, undertakes and takes on the mortgage, takes on financial finances, and then sells to other financial institutions or investors.
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In many cases, correspondent lenders offer a wider variety of mortgages than retail banks and credit unions, providing quick closing times.
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However, you may charge more or have stricter eligibility criteria.
What is a correspondent lender?
Like other mortgage lenders, correspondent lenders are born, underwriters and fund them. However, once the mortgage is closed, the correspondent lender will soon sell it to the institutional mortgage buyer. Often, it is a government-sponsored company (GSE) like Fannie Mae and Freddie Mac. This distinguishes it from lenders who also serve mortgages and has attracted interest in them for many years.
The correspondent lender will earn money by charging the mortgage origination fee and reselling the loan.
Some of the largest and most well-known mortgage lenders, including many banks and credit unions, are correspondent lenders.
Mortgage correspondent lenders and mortgage brokers
Correspondent lenders offer a variety of mortgages. Some may not be available from other banks or credit unions. In this respect, correspondent lenders are similar to mortgage brokers. Mortgage brokers, on the other hand, are strictly intermediaries, and they write the script, but don’t provide funds – correspondent lenders actually provide money for the mortgage.
Correspondent loan vs wholesale loan
Both correspondents and wholesale lenders sell their loans in the secondary mortgage market after sending them out and providing funds. However, wholesale lenders only communicate with borrowers through third parties, and correspondents provide customer service directly. The correspondent lender may also continue to service the loan after the loan is sold.
Correspondent lending mechanism
More and more, few financial institutions can afford to hold mortgages for 30 years. When you sell a loan, the lender can lend to other borrowers.
The company that purchases the loan bundles a mortgage with other conforming loans (a practice known as securitization) and sells the mortgage-backed security to pension funds, insurance companies, or other investors in the secondary mortgage market.
That may sound complicated, but you work with correspondent lenders in a way that involves other mortgage lenders during the application, underwriting and closing process.
After the correspondent lender sells a mortgage, it may continue to function as a servicer, such as taking payments or managing escrow accounts. The new owner can also take over the service obligations or sell the loan again in the secondary market.
Examples of correspondent mortgage loans
Let’s say you want to take out your FHA loan. You have decided to work with a National Bank who already has an account – this happens to be a correspondent lender. Your lender will help you find the best FHA rate and apply for a loan. The lender will then schedule an assessment and take on your funds. Meanwhile, your lender will answer your questions. Once your loan is closed, the lender will provide the funds, you will pay the seller, and the house is yours.
A few months later, your correspondent lender will sell your mortgage to another company, but will continue to service your loan. The original lender collects and transfers mortgage payments to the current mortgage holder. Additionally, the correspondent lender will keep the escrow account active.
Pros and cons of correspondent lenders
Buying a home is one of the biggest financial decisions in your life, and choosing a mortgage provider is an important part of the process. Lenders are unlikely to debate whether they plan to sell their mortgage when they make their first pitch. But if you know this is important to you, you can always ask.
Below are the advantages and disadvantages of working with a correspondent lender.
Strong Points
- Various loan types: Correspondent lenders can have dozens of relationships with potential sources of funding and offer many different types of mortgages.
- Communication with lenders: Unlike mortgage brokers, the entity deals directly with funding the loan and setting guidelines.
- Faster Pass to Closure: The underwriting and approval process is all internal, so finalizing your loan and purchasing your home can be faster and smoother.
Cons
- Pay more at the rate: In addition to the expected costs, such as origination fees and valuation fees, some correspondent lenders will charge additional fees. Ask about your loan estimate line items you don’t understand.
- Strict Underwriting Policy: Correspondent lenders must meet certain criteria such as the size of the loan, terms and the basic borrower’s creditworthiness. Other lenders may offer more flexibility.
- Servicer Switch: Assuming your lender sells rights of service along with your loan, you will need to deal with the new company when managing your loan. If you like your former lender, this can be frustrating.
Other types of mortgage lenders
Direct lender
Direct lenders, such as banks, credit unions, and insurance companies, use their own money to fund the mortgages that arise. Generally, set your own standards, especially if you don’t plan on selling your mortgage in the secondary market.
Mortgage banker
A mortgage bank can be a direct lender, such as a retail lender or a bank, credit union, or digital lender. These companies have their own cash to fund mortgages or borrow money through warehouse credit lines. They may maintain their loans or sell to entities like Fanny Mae or Freddie Mac.
Mortgage broker
Mortgage brokers link borrowers with funding, but do not directly fund or generate mortgages. Loans made through mortgage brokers must meet the requirements established by cash sources.
Portfolio lender
Portfolio lenders are direct lenders, retail lenders, or wholesale lenders. Portfolio lenders generally hold the loans they generate. For this reason, they may have more flexible borrowing requirements and be suitable for those who do not meet traditional underwriting criteria.
Wholesale Lenders
Wholesale lenders don’t work one-on-one with consumers. Instead, the mortgage provider sets underwriting criteria and provides loan money to retail lenders or mortgage brokers who work directly with the borrower.