If you’re in the market for a home loan, you may come across the term “correspondent lending.” While it plays a significant role in the mortgage industry, many borrowers are unfamiliar with how it works or how it compares to other types of mortgage lending. Here’s a breakdown of what correspondent lending is and how it could impact your mortgage experience.
What Is Correspondent Lending?
Correspondent lending is a partnership between a smaller company, like a bank, credit union, or independent mortgage company, and a larger entity often referred to as a sponsoring lender or correspondent investor. The smaller company originates, closes, and funds the mortgage under its own name but then sells the loan to the larger company. This process allows the smaller lender to free up capital and continue offering more loans to consumers.
In many cases, you might not even know you’re working with a correspondent lender unless you ask. Correspondent lenders handle the entire mortgage process, including underwriting and funding, but the loan is typically sold to another company after closing. This distinction is important because it can affect your mortgage experience in various ways.
Correspondent Lender vs. Retail Lender vs. Mortgage Broker
To better understand correspondent lending, it’s helpful to compare it with other types of lenders, such as retail lenders and mortgage brokers:
- Retail Lenders: These financial institutions, like banks or credit unions, offer mortgages directly to borrowers. They may have fewer loan options but often provide other financial products, creating a one-stop-shop experience for consumers.
- Mortgage Brokers: Unlike correspondent lenders, mortgage brokers do not underwrite, close, or fund loans. Instead, they work with a variety of wholesale lenders to find the best loan options for their clients. While this can provide access to more specialized programs, it can also lead to longer processing times since brokers have less control over the loan process.
- Correspondent Lenders: Correspondent lenders combine elements of both retail lenders and mortgage brokers. They approve and close loans like a retail lender, but they also work with multiple funding sources, offering a wide range of loan programs to borrowers.
(Here’s a link to a table comparing correspondent lenders, retail lenders, and mortgage brokers in key aspects of the mortgage lending process.)
Applying for a Mortgage with a Correspondent Lender
When you apply for a mortgage with a correspondent lender, you’ll benefit from their relationships with various investors. This can be particularly advantageous if you have a unique financial situation or need a non-conforming loan. For example, if you’re seeking an FHA loan, the correspondent lender will match you with an investor who offers the best terms that align with your qualifications.
Working with a delegated correspondent lender, who underwrites the loan in-house, can also help streamline the process, potentially reducing delays and providing better customer service.
Pros and Cons of Using a Correspondent Lender
Like any mortgage option, working with a correspondent lender has its pros and cons:
Pros:
- Access to a wide variety of loan programs, increasing your chances of finding a mortgage that suits your needs.
- Easier price shopping, as the lender can help you find a competitive interest rate and lower closing costs.
- Potential for a faster, smoother transaction, especially if you work with a delegated correspondent lender.
Cons:
- The loan must meet the investor’s standards, which might limit your options.
- Non-delegated correspondents may be slower due to the involvement of another entity in the underwriting process.
- After closing, your lender may not be your mortgage servicer, which could be disappointing if you chose them for their customer service.
Understanding how correspondent lending works and how it differs from other types of mortgage lending can help you make a more informed decision when shopping for a home loan. Whether you’re a first-time homebuyer or looking to refinance, knowing the ins and outs of correspondent lending could be the key to finding the best mortgage for your situation.
Here’s a link to the original news article: https://www.forbes.com/advisor/mortgages/correspondent-lending/