Correspondent lending is a major part of the mortgage origination business. But if you’re shopping for a home loan, you probably won’t know if you’re applying with a correspondent lender unless you ask.
More than one in four borrowers got their home loans through correspondents in the third quarter of 2023, according to Inside Mortgage Finance, a leading mortgage industry publication. Yet, many borrowers likely couldn’t tell you how correspondent lending works, or how it differs from other forms of mortgage lending.
What Is Correspondent Lending and How Does It Work?
Correspondent lending is an arrangement between a smaller company and a larger company that connects consumers with mortgages:
The smaller company originates, closes and funds mortgages under its own name. This company might be a bank, credit union or independent mortgage company.
The larger company may be referred to as a sponsoring lender, investor, correspondent investor, aggregator or even wholesale lender and purchases the closed home loan from the smaller company.
In a correspondent lending agreement, the larger company pays a premium plus the loan amount back to the smaller lender—the originating lender—freeing up cash for the smaller lender so that it can provide more loans to consumers, explains Diane Hughes, executive vice president and director of mortgage lending at UMB Bank in Kansas City, Missouri.
Who’s Who in Correspondent Lending?
Both the smaller company and the larger company in a correspondent lending relationship are correctly referred to as correspondent lenders.
“It’s a confusing term within the mortgage industry,” says Hughes.
Another thing that can be confusing is that lenders, especially large mortgage lenders, sometimes fall into more than one category. For example, Pennymac and Newrez are both retail and wholesale lenders in addition to being correspondent lenders. They have different divisions within the company for each type. By offering loans through different channels, they can originate more loans overall.
Underwriting and Funding
If the correspondent lender is a delegated correspondent, they will underwrite the loan. If they are a non-delegated correspondent or mini-correspondent, the purchasing lender or investor does the underwriting.
Correspondent lenders are said to use their own funds to originate loans. In reality, there’s a good chance the company will fund your loan indirectly through a warehouse line of credit. This means they’re borrowing money short term to close your loan. Once they sell your loan, they can use that money to replenish the credit line.
Correspondent Lender vs. Retail Lender vs. Mortgage Broker: What’s the Difference?
Knowing the differences between a correspondent lender, retail lender and mortgage broker could help you get a better deal on a home loan. It could even mean the difference between getting approved for a mortgage and getting rejected.
As a consumer shopping for a mortgage, here’s what you should know about how these three categories of lenders compare.
Retail Lenders
“Retail lenders are financial institutions that offer mortgages directly to borrowers,” says Tai Christensen, co-founder and president of Arrive Home in South Jordan, Utah.
Banks, credit unions and mortgage bankers are all examples of retail lenders. Compared to a mortgage broker or correspondent lender, retail lenders often have fewer offerings.
“However, a lot of retail lenders [offer other products], such as checking and savings accounts, auto loans and even personal loans,” says Christensen. “This can be a benefit to borrowers who want a one-stop-shop experience.”
Mortgage Brokers
A mortgage broker doesn’t underwrite, close or fund mortgages. Typically, a broker will receive mortgages from a variety of wholesale lenders.
To see the third type of lender and read the rest of the article, click here.