What is a correspondent lender?


What is a correspondent lender?

Imagine someone sends you a birthday card. You and the sender are correspondents in communication with each other. In the mortgage world, the lender you know and the buyer or investor buying your loan are also in communication with each other. Both can be considered correspondent lenders.

You might think of a correspondent lender as a mortgage broker, mortgage banker, online lender or a direct lender like a bank, credit union, or insurance company. Since each has the ability to provide mortgages, they may seem similar, but behind the scenes they also have the ability to engage in matching 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 the matching loan works

Let’s explore what would happen in a matching transaction if you were looking for a $300,000 mortgage.

Suppose 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 of them could have been the source of your last mortgage.

While borrowers view 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 doesn’t want to keep your $300,000 loan. Why? The lender has limited capital, if any, and wants to originate more loans. By selling the loan, your retail lender now gets their $300,000 back, and with new capital, they can make additional loans that incur new fees and charges. (In many cases, the origination of your mortgage and its sale occur simultaneously at settlement, a process called table financing.)

We can now take the basic retail model and flip it. Instead of a retail lender who needs capital, there could be a mortgage investor who needs more loans. The investor, sometimes called a wholesaler, can say, “I have 10 million dollars. I will buy loans from approved lenders if they meet certain standards.

These standards can be FHA or VA standards, or compliant standards, mortgages that meet Fannie Mae and Freddie Mac requirements. Sometimes investors will want non-conforming loans such as jumbo mortgages. In all cases, the retail lender must meet the requirements of the investor. This is one of the reasons why lenders are so careful with borrower information, why they ask so many questions and want so much documentation.

Who funds a matching mortgage?

When you go to closing, your lender returns the pledged funds to you. This can happen in several ways:

  1. The retail lender puts up the mortgage money, then immediately turns around at closing and sells the loan to an investor. This is often how mortgage bankers and direct lenders operate.
  2. The investor or wholesaler finances the loan. This is generally how mortgage brokers operate – they don’t have the money to fund their own loans, so they basically act as outlets for direct lenders and others with money.
  3. A direct lender with cash – perhaps a bank – funds the loan and holds it. This is known as portfolio loans.

Advantages and disadvantages of the matching loan

The big advantage of loan matching is that a particular lender can offer a wide variety of mortgage loans. This gives the lender the best opportunity to fully meet your needs with mortgage options that exist, but may be unknown to other lenders. A correspondent lender might have dozens of relationships with potential lending sources.

These sources offer loans that are often different in one way or another from what other sources offer. For example, a wholesaler might allow one borrower to have a debt-to-income ratio (DTI) of 50%, while another will only reach 47%. A correspondent lender searches through the wholesaler’s guidelines to find the mortgage source most likely to accept you as a borrower.

In theory, however, a direct lender such as a bank, credit union, or mortgage banker can only sell the loan products they want to fund. This appears to be a negative, as it suggests that a direct lender’s mortgage options are limited. However, there are a lot of crossovers in the mortgage industry. A bank, mortgage banker or credit union can 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, they can determine if you qualify for financing based on their own standards.
  • Mortgage bankers – Mortgage bankers have the necessary liquidity to finance the loans they grant. They can initiate loans themselves and sell them to investors, or they can originate loans financed by a third party.
  • Mortgage brokers – Not all retail lenders have the money to fund your mortgage. A mortgage broker represents investors and other lending sources that provide liquidity. The loan must meet the requirements established by the cash source.
  • Portfolio lenders – A direct lender can keep your loan or sell it on the secondary market or directly to an investor. If a lender keeps your loan, they are a “portfolio” lender because your loan becomes an asset on their books. The requirements for portfolio loans are not necessarily the same as for typical mortgage products because the portfolio lender does not resell the debt. It can therefore sometimes offer better financing options to borrowers who do not quite meet the usual underwriting standards.
  • Wholesale lenders – As a borrower, you do not deal directly with a wholesaler. Wholesale lenders provide liquidity to retail lenders. They set the underwriting guidelines and fund the loan at closing or buy the loan from the retailers.

How to find the best mortgage lender

  1. Check your credit reports. A high credit score usually means a lower mortgage rate. Check your credit reports to make sure there are no factual errors or outdated items. Here’s some good news: you can now check your credit scores weekly free of charge until April 20, 2022, at AnnualCreditReport.com.
  2. Compare APRs and fees. The mortgage industry is very competitive. If you see interest rates that seem particularly low, check the fine print for fees and charges. They represent a real cost, whatever their name.
  3. Obtain pre-approved. This pays to speak with a number of lenders. You want to know the rates and terms, but you also want to know if you can reasonably qualify for a given loan amount. Get pre-approved 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 to get a realistic assessment of what you might qualify for.

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