When financing your home purchase, it’s always nice to know your options— after all, this is likely one of the most significant financial decisions you’ll make in your lifetime. You’re probably familiar with the typical retail mortgages that you can obtain from most credit unions or banks, but are you familiar with correspondent lending?
In this article, we’ll dive into the ins and outs of correspondent lending and answer questions like:
- What is a correspondent lender?
- How does a homebuyer work with a correspondent lender?
- What are the advantages and disadvantages of a correspondent loan?
- How are correspondent lenders and mortgage brokers different?
What Is a Correspondent Lender?
A correspondent lender is a unique type of lender that originates, underwrites, and funds a mortgage loan using their name. The correspondent lender will then sell the loan to a larger mortgage lender, who becomes the loan servicer. The loan servicer will be the entity in charge of collecting the monthly payments. The institution that bought the mortgage may turn around and sell it once more on the secondary market, often to a large aggregator like Freddie Mac or Fannie Mae.
The correspondent lender funds the loan themselves. Unless they have that large amount of cash on hand, the correspondent lender will typically get their funds from what is called a warehouse line. Warehouse lines are simply lines of credit used by mortgage bankers. They allow them to take out significant sums of money to fund the correspondent loan and pay back their debt once another entity buys the loan.
You might be wondering who buys these correspondent loans? The same credit unions, banks, and other financial institutions that lend directly to consumers also purchase loans from correspondent lenders. This means that you can take out a loan with a correspondent lender, but a credit union could obtain your loan on the secondary market and become your servicer. By the time they purchase the loan, all of the hard work of the origination process is complete.
How Does a Homebuyer Work with a Correspondent Lender?
To illustrate how this type of loan works, let’s take a look at how the correspondent loan process would play out.
You’ve finally found your dream home. Congrats! You’ll need to take out a mortgage for $300,000, so, like any loan, you begin the process with an application. You’ll go through the typical approval process, but once you’re approved, the correspondent lender funds the mortgage using a warehouse line of credit.
After closing, Credit Union X decides to purchase your loan. The money from the sale will be used to pay off what the correspondent lender borrowed on the warehouse line. Your loan servicer is now Credit Union X, and you’ll make all of your monthly mortgage payments out to them.