What is a correspondent lender?
Imagine someone sends you a birthday card. You and the sender are both parties in communication with each other. In the mortgage world, the lender you know and the buyer or investor who buys your loan are also in communication. Both can be considered as matching lenders.
You might consider a matching lender like a mortgage broker, mortgage banker, online lender, or direct lender like a bank, credit union, or insurance company. Since everyone has the ability to provide mortgages, they may seem similar, but behind the scenes they also have the ability to engage in corresponding 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 corresponding loan works
Let’s explore what would happen in a matching transaction if you were looking for a $ 300,000 mortgage.
Suppose you are shopping around and talking to a number of retail lenders. These are lenders who work directly with the public. You might have found them online or through a friend’s recommendation or ad, or one of them might have been the source of your last mortgage.
As borrowers see a $ 300,000 mortgage as debt, lenders view the same mortgage as an asset of $ 300,000 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 or no capital and wants more loans. By selling the loan, your retail lender now recovers their $ 300,000 and, with new capital, they can make additional loans that generate new fees and charges. (In many cases, your mortgage origination and sale take place simultaneously at the time of settlement, a process called the finance table.)
Now we can take the basic retail model and reverse it. Instead of a retail lender who needs capital, there might be a mortgage investor who needs more loans. The investor, sometimes referred to as a wholesaler, may say, “I have $ 10 million. I will buy loans from approved lenders if they meet certain standards.
These standards can be FHA or VA standards, or compliant standards, for mortgages that meet the requirements of Fannie Mae and Freddie Mac. Sometimes investors will want non-conforming loans such as jumbo mortgages. Either way, 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 finances a corresponding mortgage?
When you go to closing, your lender returns the pledged funds. This can happen in several ways:
- The retail lender pays the mortgage money, then immediately turns around at closing and sells the loan to an investor. This is often the way mortgage bankers and direct lenders work.
- The investor or wholesaler finances the loan. This is usually how mortgage brokers work – they don’t have the money to fund their own loans, so they basically act as outlets for direct lenders and others with money.
- A direct lender with money – perhaps a bank – finances the loan and holds it. This is called the portfolio loan.
Advantages and disadvantages of the mail order loan
The big advantage of matching loans is that an individual lender can offer a wide variety of mortgages. This gives the lender the best opportunity to fully meet your needs with the mortgage options available, 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 are offering. For example, one 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 wholesalers’ guidelines for 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 wish to finance. This appears to be 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 matching lender by selling mortgage products from 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 funding based on their own standards.
- Mortgage bankers – Mortgage bankers have the necessary liquidity to finance the loans they take out. They can create loans on their own and sell them to investors, or they can create third party funded loans.
- Mortgage brokers – Not all retail lenders have the money to fund your mortgage. A mortgage broker represents the investors and other loan sources who provide the money. The loan should meet the requirements set by the cash source.
- Portfolio lenders – A direct lender can hold your loan or sell it on the secondary market or directly to an investor. If a lender keeps your loan, it is a “portfolio” lender because your loan becomes an asset on their books. The requirements for portfolio loans are not necessarily the same as typical mortgage products because the portfolio lender does not resell the debt, so they can sometimes offer better financing options for borrowers who are not quite meeting. the usual underwriting standards.
- Wholesale lenders – As a borrower, you do not deal directly with a wholesaler. Wholesale lenders provide money to retail lenders. They set underwriting guidelines and 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 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.
- Compare the 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.
- Get pre-approved. It is worth talking with a number of lenders. You want to know the rates and terms, but you also want to know if you can actually qualify for a certain loan amount. Get pre-approval from 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 be entitled to.