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Key takeaways
- Correspondent lenders originate, underwrite and finance mortgages, then sell them to other financial institutions or to investors.
- Correspondent lenders often offer a greater variety of mortgages than retail banks or credit unions, as well as speedier closing times.
- However, they may charge more fees or have more stringent qualifying criteria.
What is a correspondent lender?
Like other mortgage lenders, a correspondent lender originates, underwrites and funds mortgages. But after the mortgage closes, a correspondent lender promptly sells it to an institutional mortgage buyer — often, a government-sponsored enterprise (GSE) like Fannie Mae or Freddie Mac. This distinguishes them from lenders who also service mortgages, collecting interest on them over the years.
Correspondent lenders charge an origination fee for the mortgage and also make money by reselling the loan.
Some of the biggest and most recognizable mortgage lenders — including many banks and credit unions — are correspondent lenders.
Mortgage correspondent lenders vs. mortgage brokers
Correspondent lenders offer many different kinds of mortgages, some that may not be available from your other banks or credit unions. In this respect, correspondent lenders are similar to mortgage brokers. On the other hand, a mortgage broker is strictly the middleman — they do the legwork, but don’t furnish any funds — while a correspondent lender actually provides the money for the mortgage.
Correspondent lending vs. wholesale lending
Correspondent and wholesale lenders both sell loans on the secondary mortgage market after originating and funding them. However, a wholesale lender only communicates with a borrower through a third party, while a correspondent lender offers direct customer service. A correspondent lender may also continue to service a loan even after the loan is sold, which a wholesale lender would not typically do.
How correspondent lending works
Increasingly, few financial institutions can afford to hold onto mortgages for 30 years. Selling your loan generates cash your lender can then lend to other borrowers.
The companies that buy loans, in turn, bundle mortgages with 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.
That may sound complicated, but you’ll work with a correspondent lender the way you would any other mortgage lender during the application, underwriting and closing processes.
After a correspondent lender sells your mortgage, it may continue to act as its servicer, including taking your payments and managing your escrow account. The new owner may also take over servicing duties — or sell your loan yet again on the secondary market.
Example of correspondent mortgage lending
Let’s say you want to take out an FHA loan. You decide to work with the national bank where you already have an account — which happens to be a correspondent lender. Your loan officer helps you find the best FHA rates and apply for the loan. The lender will then schedule an appraisal and underwrite your funding, during which time your loan officer answers your questions. 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 original lender collects and forwards your mortgage payments to the current mortgage holder. In addition, your correspondent lender keeps 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. A lender is unlikely to discuss whether it plans to sell your mortgage when making its initial pitch. But if knowing this is important to you, you can always ask.
The following are benefits and drawbacks of working with a correspondent lender.
Pros
- Variety of loan types: Correspondent lenders could have dozens of relationships with potential funding sources, offering many different types of mortgages — more than you might find with a smaller company.
- Communication with the lender: Unlike with a mortgage broker, you’ll deal directly with the entity funding your loan and setting the guidelines.
- 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.
Cons
- Pay more in fees: In addition to the costs you might expect, like an origination fee and an appraisal fee, some correspondent lenders tack on additional fees. Ask questions about any line items on your Loan Estimate that you don’t understand.
- 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. Other lenders may offer more flexibility.
- Servicer switch: Assuming your lender sells the servicing rights along with your loan, you’ll have to deal with a new company as you manage your loan. This may be frustrating if you liked your original lender.
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 the mortgages it originates. It generally sets 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 lender 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 sell them to entities like Fannie Mae and Freddie Mac.
Mortgage brokers
A mortgage broker connects borrowers with financing but doesn’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 retain the loans they originate. Because of this, they may have more flexible borrowing requirements and be a better fit for those who don’t meet traditional underwriting standards.
Wholesale lenders
A wholesale lender doesn’t work one-on-one 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.
FAQ
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