What Is Correspondent Lending? A Full Guide | AD Mortgage (2024)

Full of confusing terms and complex structures, mortgage lending can seem like uncharted waters. Сorrespondent lending is not an exception here. But what exactly is it, and how does it fit into the homebuying process? Let’s jump right into correspondent lending, explore its advantages and disadvantages, learn how it compares to other lending options, and find out why it might be the right choice for borrowers’ mortgage needs.

Introduction to Correspondent Lending

A correspondent lender takes the mortgage application, collects the documents, and ensures the borrower qualifies for the loan. And here comes the tricky part – correspondent lenders work with larger financial institutions, like A&D Mortgage. Once a loan is approved and closed, the correspondent lender sells it to these investors, freeing up their funds to originate new loans to other borrowers, keeping the mortgage market functioning smoothly. This collaboration benefits not only the market but also the borrower by providing more loan options through a network of investors. This network gives borrowers access to a wider variety of loan programs, increasing their chances of finding the best fit for them.

How Correspondent Lending Works

A correspondent lender is an intermediary between borrowers and investors. They handle the entire mortgage application process for the borrower: collecting documents, verifying income and employment, ordering appraisals, and ensuring everything meets loan approval guidelines. They essentially act like a retail lender from the borrower’s perspective. To fund the loan upfront, correspondent lenders don’t use their own capital. Instead, they rely on a line of credit, called a warehouse line, to provide the initial funds for the loan. This allows them to originate multiple loans at the same time. Once the loan is approved, the correspondent lender sells the mortgage to an investor.

Overall, correspondent lenders act as a bridge between borrowers and investors, streamlining the mortgage origination process and providing more options for borrowers by increasing lender participation in the market.

The Life Cycle of a Loan

In general, the life cycle of a loan in correspondent lending goes as follows:

1. Loan Origination. A correspondent lender interacts with the borrower, collects their application and documents, and works to get them pre-approved for a loan. This involves verifying income and employment, assessing creditworthiness, and selecting the most suitable loan program.
2. Underwriting. The loan details are submitted to the investor/aggregator that assesses the borrower’s risk and determines whether to approve the loan. This involves a thorough review of the borrower’s financial situation, property valuation, and overall risk profile.
3. Loan Funding. Using a warehouse line, a correspondent lender acts as the initial lender and provides the money to close the loan for the borrower’s home purchase. This ensures a smooth and timely closing for the borrower.
4. Sale. Once finalized, a correspondent lender sells the loan to the investor/aggregator, recouping their initial investment and freeing up capital for future loans.

Example

John, a young professional looking to purchase his first home, contacts a correspondent lender for pre-approval. A correspondent lender guides John through the process, verifies his income and credit, and selects an appropriate FHA loan program with a competitive interest rate from the network of investors.

Once John’s loan application is complete, a lender uses a warehouse line of credit to fund the closing on his condo. This line of credit allows them to originate loans without requiring a large amount of upfront capital. After closing, the lender sells John’s loan to Fannie Mae. This frees up the lender’s capital to focus on originating new loans for other clients.

Key Players in Correspondent Lending

There are two key players in the correspondent lending process: the originators (smaller companies) and the investors/aggregators (larger companies).

Originators are responsible for originating loans, which means they work with borrowers to complete loan applications and gather all the necessary documentation to get a loan approved. Unlike a large bank, these smaller companies don’t keep the loans they originate.

Instead, they partner with larger companies that act as investors/aggregators. These investor companies buy the completed loans from the originators. This allows the originators to focus on finding new borrowers instead of managing a bunch of loans. The investors/aggregators then bundle the loans, package them into mortgage-backed securities (MBS), and sell them to larger financial institutions on the secondary market.

Correspondent lenders often work with government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These organizations set guidelines for the types of loans that can be sold to them, and correspondent lenders must ensure that the loans they originate meet these standards.

In turn, the GSEs purchase loans, providing liquidity to the market and allowing correspondent lenders to continue making loans. This may even result in lower interest rates for borrowers in the long run.

The relationship between correspondent lenders and the GSEs is critical to the success of the correspondent lending industry. So, when it comes to correspondent lending, it’s all about teamwork. It’s a system designed to get mortgages where they need to go.

Types of Correspondent Lenders

There are two types of correspondent lenders: delegated and non-delegated. They differ in terms of who handles the loan underwriting process.

The delegated correspondent lender has the authority to underwrite the loan themselves. This allows for faster loan processing and more flexibility in terms of loan approval since the correspondent sets the guidelines.

In non-delegated correspondent lending, the investor or loan buyer underwrites the loan. This can be a slower process because the loan application needs to be reviewed by another party.

Correspondent Lending vs. Other Mortgage Lending Types

In the mortgage industry, in addition to correspondent lenders, there are other types of lenders you may encounter. They are retail lenders, mortgage brokers, and wholesale lenders.

Retail Lenders

Retail lenders operate much like local bank branches, offering their own loan options and funding mortgages with their own capital. They originate and service the loans themselves, meaning they manage the entire process from application to repayment. Correspondent lenders, like retail lenders, also originate and fund loans themselves. However, they sell these loans to investors after mortgage origination. This gives them more flexibility in the types of loans they can offer and the underwriting guidelines they can follow, as they are not limited by their own capital reserves. They may or may not continue to service the loan after selling it.

Mortgage Brokers

Mortgage brokers are matchmakers for mortgages. The main difference between a correspondent lender and a mortgage broker is in how they operate. Brokers act as intermediaries between borrowers and lenders and may offer loans from a variety of different lenders. They earn a commission on each loan they originate, and their goal is to find the best loan for their client’s needs rather than originating the loan themselves. Mortgage brokers may be able to offer a wider variety of loan options, but they do not have as much control over the underwriting and loan funding process as correspondent lenders.

Wholesale Lenders

Wholesale lenders are similar to correspondent lenders: they originate, fund, service, and sell loans. The key difference between a correspondent lender and a wholesale lender is in who they work with. Wholesale lenders work only with mortgage brokers and other lenders and not directly with borrowers. Wholesale lenders typically offer a wider range of loan products and have lower interest rates and closing costs. A&D Mortgage is a wholesale mortgage lender.

Here’s a table summarizing the key differences:

Advantages and Disadvantages of Each Type

From a borrower’s perspective, each type of lender has its own advantages and disadvantages. Correspondent lenders often have a wider variety of loan options than retail lenders and may be able to offer more flexible underwriting guidelines and faster processing times, but it can be more expensive than other types of mortgage lending, as correspondent lenders charge fees for their services.

Retail lenders may offer more competitive rates and may have special deals for existing customers. However, they may have limited loan options, and their underwriting guidelines may be more stringent.

Mortgage brokers may offer a wider variety of loan options, but their fees may be higher, and the loan process may involve more back-and-forth.

Choosing the right lender depends on the borrower’s priorities. If they want a simple process and are comfortable with limited options, a retail lender may be a good solution. If they prioritize the best rate and the most choices, a broker is a strong option. Correspondent lenders offer balance, but a borrower should be ready for potential servicing changes.

Benefits of Using a Correspondent Lender

Here are some key reasons why correspondent lending may be a good choice for your mortgage business.

Variety of Loan Programs

Correspondent lenders often have access to a wide selection of loan programs. This allows a borrower to find a loan that fits their specific financial situation, whether they’re first-time homebuyers or looking to refinance.

Competitive Interest Rates

By working with multiple investors, correspondent lenders can potentially offer competitive interest rates to attract borrowers.

Potential for Faster Processing

Correspondent lenders may have a faster loan approval process because they underwrite the loans themselves. This can be advantageous if a borrower is on a tight timeline to close on a property.

Considerations for Borrowers

Before choosing a correspondent lender, borrowers should be aware that correspondent lenders may charge a variety of fees, some of which may be higher than what they’d see with a retail lender. Here are some common ones:

• Origination fee. This covers the basic cost of processing a loan application.
• Underwriting fee. This fee goes toward the process of evaluating a borrower’s financial situation and risk as a borrower.
• Funding fee. This is a fee for the correspondent lender to secure the final funds for a loan.
• Processing fee. This covers the administrative costs of processing a loan application.

Correspondent lenders may charge additional fees:

• Lock extension fee.If a borrower needs to extend the interest rate lock period they negotiated, there may be a fee.
• Suspension fee. This is a fee charged when a borrower’s loan approval process is delayed for reasons on the borrower’s part.

Borrowers should also understand that their loan will be sold to an investor, which may affect their loan servicing experience. Once the loan is sold, a borrower may no longer interact with the original lender. Their loan servicing, which means things like sending in monthly payments and getting help, will be handled by the investor. This can be a smooth transition, but it’s good to know who to contact with questions down the road. Also, the investor may have slightly different requirements than the original lender.

Choosing the Right Lending Option

There are many correspondent lenders out there today, and they are not all created equal. With so many choices, how to pick the right one? First of all, there are some factors a borrower should consider. They are the lender’s reputation, experience, loan programs and products offered, and the fees and interest rates. That way, a borrower can find a lender who has a strong track record of success to provide them with the products and services that meet their unique needs.

To better understand whether the lender is good for them, it’s also important to ask potential lenders questions.

• What types of loans do you specialize in? This will help a borrower see if a lender has a program that fits their needs.
• What are your current interest rates and fees? Getting quotes from multiple lenders can save a borrower money.
• How long does the typical closing process take? Knowing the timeline helps a borrower plan for closing on their dream home.
• Can you provide references from past clients? Talking to past clients can give a potential borrower valuable insight into the lender’s service.
• What are your underwriting criteria? Understanding the loan approval requirements will help a borrower assess whether they’re a good fit up front. This can save them time and avoid getting their hopes up for a loan they might not qualify for.

Conclusion

Correspondent lending is an important part of the mortgage industry. It is an essential source of liquidity for the housing market and provides borrowers with a variety of loan programs and products. Of course, like any lending option, correspondent lending isn’t without its potential drawbacks, such as higher fees and the possibility of loan sales. However, it also offers distinct advantages over other types of lending, such as a wide variety of loan products and flexible underwriting requirements.