What is Correspondent Lending?
“Correspondent lending” is the origination and sale of mortgages on the “mortgage secondary market,” where mortgage originators and mortgage investors get together to do business.
A “correspondent lender” is a special type of mortgage lender that originates and funds loans in its own name. Correspondent lenders have their own mortgage underwriting staff and fund the loans with their own money. (This is in contrast to a mortgage broker, which doesn’t do any underwriting, loan approval or funding in-house.)
When the correspondent lender underwrites the loan, it will typically follow the guidelines of a particular investor that the loan will be sold to via the secondary market. Once the mortgage is sold, the servicing may be handled by a different company, which will be responsible for collecting monthly mortgage payments, applying a portion of each payment to reducing principal and interest—and then accruing funds for and paying property tax and homeowner’s insurance bills.
Typically, correspondent lenders fund their loans from a “warehouse line,” which is a line of credit that can be several million to tens of millions of dollars or more. Correspondent lenders can be small, with just a few employees, a modest credit line and licensed to operate in just a state or two. Larger correspondent lenders can have several thousand employees, a substantial credit line and permission to operate in all 50 states. Smaller correspondent lenders may have relationships with just a handful of mortgage investors, while larger lenders could work with dozens every day.
An example of how correspondent lending works.
Let’s say you apply for a $250,000 mortgage with a correspondent lender. After the loan is approved, the correspondent lender will access its warehouse (credit) line to obtain the $250,000 and then wire the funds to the escrow or title company that will conduct the loan closing.
After closing, the correspondent lender will sell your mortgage to an investor via the secondary market. Part of the proceeds from that sale will be used to replace the $250,000 borrowed against the warehouse line. So now the correspondent lender has that credit available to help the next borrower.
In this way, correspondent lenders can continue to provide a steady stream of mortgage funds to qualified homebuyers.
A unique advantage.
Borrowers who work with correspondent lenders truly can have the best of both worlds. When you work with a correspondent lender, you’re working directly with the professionals who will make the final loan decision. (Mortgage brokers can’t offer that advantage.)
Plus, you’re not restricted to just a few mortgage options, as you might be with a direct lender that doesn’t sell its loans via the secondary market. With a correspondent lender, your mortgage options are limited only by what that lender’s investors are prepared to buy. And for those correspondent lenders with the scale to work with a lot of investors, you’ll have a broader choice of options to select from, based on your home ownership goals.