Knowing your alternatives when financing your house purchase is always a good idea; after all, this is perhaps one of the most important financial decisions you’ll ever make. Are you familiar with correspondent lending? You’re definitely familiar with the conventional retail mortgages you can get from the majority of credit unions or banks. We’ll explore the ins and outs of correspondent lending in this article. We’ll discuss correspondent financing, how a home buyer interacts with this category of lender, its benefits and drawbacks, and how a correspondent lender differs from a mortgage broker.
What is a correspondent lender?
Imagine receiving a birthday card from someone. You and the sender are both communicating with one another as correspondents. In the world of mortgages, communication exists between the lender you know and the investor or buyer who buys your loan. Each of them qualifies as a correspondent lender.
The term “correspondent lender” can refer to a bank, credit union, insurance company, mortgage broker, internet lender, or mortgage banker. Although they may appear similar because they can all offer mortgages, each has the ability to conduct correspondent transactions, such as the sale of your loan to a buyer like Fannie Mae, Freddie Mac, Ginnie Mae, a pension fund, insurance company, or another investor in the secondary mortgage market.
How correspondent lending works
Let’s examine what might occur in a correspondent transaction in the case of a $300,000 mortgage.
Let’s say you compare options and talk to a few retail lenders. These are lenders who conduct business with customers directly. You might have discovered them online, through a tip from a friend, an advertisement, or one might have provided the funding for your previous mortgage.
Lenders view a $300,000 mortgage as a $300,000 sellable asset, whereas borrowers view it as debt. An intriguing fact is this: The $300,000 loan is typically not wanted by the retail lender. Why? The lender wants to originate new loans but has little or no money to do so. Your retail lender now recovers its $300,000 through the sale of the loan, and with greater cash, it may create other loans that result in more fees and charges. (In many instances, a process known as table funding takes place at settlement where your mortgage is both originated and sold.)
The fundamental retail model can now be modified. A mortgage investor may require more loans as opposed to a retail lender who needs funds. The wholesaler, often known as the investor, may declare, “I have $10 million. If approved lenders match my criteria, I will buy their loans.
These criteria may include FHA, VA, or conforming standards—mortgages that satisfy Freddie Mac and Fannie Mae rules. Investors may occasionally be interested in nonconforming loans like jumbo mortgages. In any event, the requirements of the investor must be satisfied by the retail lender. This is one of the reasons why lenders are so cautious with borrower data, why they have so many inquiries, and why they require so much supporting documents.
Who funds a correspondent mortgage?
Your lender provides the funds agreed at the closing. Several things can cause this to occur:
- When the loan closes, the retail lender who put up the mortgage money immediately turns around and sells the debt to an investor. Mortgage bankers and direct lenders frequently operate in this manner.
- The loan is funded by the investor or wholesaler. Mortgage brokers often operate in this way; since they lack the financial resources to fund their own loans, they essentially serve as retail outlets for direct lenders and other investors with funds.
- The loan is funded and kept by a direct lender who has cash on hand, like a bank. Portfolio lending is what this is called.
Many other mortgage lenders
- Direct lenders – A direct lender, such as a bank, credit union, or insurance business, has the funds to finance your mortgage. A direct lender can assess your eligibility for credit based on its own requirements because it has the funds to do so.
- Mortgage lenders The money needed to fund the loans they originate is available to mortgage bankers. They can either start lending on their own and sell the loans to investors, or they can start lending with outside funding.
- Mortgage agents Some retail lenders lack the resources necessary to fund your mortgage. A mortgage broker acts as the financiers’ agent, securing loans from investors and other sources. The loan must adhere to the guidelines set forth by the funding source.
- Lenders with portfolios – A direct lender has the option to keep your loan, sell it on the secondary market, or provide it to an investor directly. If a lender keeps your loan, it qualifies as a “portfolio lender” since it adds it to its books as an asset. Because the portfolio lender is not reselling the debt, the requirements for portfolio loans are not always the same as those for conventional mortgage products. Because of this, it is occasionally possible to provide better financing options for borrowers who don’t quite meet standard underwriting requirements.
- Wholesale financiers You don’t actually conduct business with a wholesaler directly as the borrower. Retail lenders receive funding from wholesale lenders. They establish the underwriting standards and fund the loan at closure or purchase it from merchants.