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As a prospective home buyer, there are several decisions for you to make regarding your purchase, one of these being your mortgage financing. And before you make your final decision, it’s important to understand all your options.
One financing route worth exploring is correspondent lending – a popular route for many types of borrowers. Let’s take a look.
What Is Correspondent Lending?
Correspondent lending occurs when you work with a lender who originates, underwrites, funds, and then sells your mortgage loan to another financing institution right after closing. The loan could be sold to Freddie Mac, Fannie Mae, a financial institution, various individual mortgage investors, or another government-sponsored enterprise like the FHA or VA.
This type of lending structure is prevalent in the mortgage world today as it makes it easier for lenders to free up capital and fund other projects. In turn, correspondent lending increases the number of available lenders and helps with housing affordability.
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How Does Correspondent Lending Work?
When you work with a lender, they’ll begin the process of funding your purchase by collecting all the necessary documentation – i.e., income statements, W2s, tax returns, etc. The documentation is used to qualify you for your loan through a process called underwriting, in which they’ll determine your reliability as a borrower. You’ll work with this lender up until closing. You’ll sign their closing documents, including the mortgage and loan note, and they’ll fund the loan.
Once funded and closed, your lender will begin shopping around for investors to sell the loan note. This may be another financial institution or a government-backed entity, depending on the type of loan you’ve chosen. Whoever buys the loan note will be your loan servicer. They will collect your monthly mortgage paymentsand maintain your escrow account.
Correspondent Lending Example
Let’s say you’re looking to take out a conventional loan for $250,000. You start working with a loan officer recommended by a friend or your real estate agent. All your communication leading up to the closing is with this loan officer and their team. They are there to answer your questions and collect all necessary documentation for underwriting.
As closing approaches, you get the green light from their underwriting that you’re clear to close on the loan. You sign closing documents, get the keys, and move into your new home. Next, you notice that your loan servicer has changed, and you’ll make your first mortgage loan payment to a completely different lender.
Why did your lender sell your loan? When they loaned you money for your purchase, they lost $250,000 in capital and added additional risk to their portfolio. Since you will pay back this loan for over 30 years, the lender wanted to reduce their portfolio risk position and earn a quick return on your loan. So, they’re going to sell the loan to a mortgage investorto offset risk and receive new capital to fund other projects.
What Are the Advantages of Correspondent Lending?
Correspondent lending makes it more affordable and accessible for borrowers totake out mortgage loans. Without it, fewer lenders would be ready with the capital to assist in home purchases. Fewer lenders mean increased competition among borrowers.
Correspondent lending also makes it possible for lenders to offer a wider variety of mortgage loans. Your lender may not have direct access to certain loan terms, but if they can find an investor on the secondary market that does, then that’s great news for you.
>> More: How to Choose the Best Mortgage
What Are the Disadvantages of Correspondent Lending?
With all the advantages of correspondent lending, it’s important to be selective and understand the potential consequences of going with the wrong lender. Given the nature of correspondent lending, there could be additional regulatory policies upheld by secondary market investors. This might mean more hoops for you to jump through to qualify.
Additionally, borrowers should know that once the closing has been finalized and their loan has been sold, they will be subject to the new note holder’s customer service and payment collection process. So, if you enjoyed working with your loan originator’s team, you might need to adjust to another way of doing things.
Who Funds a Correspondent Mortgage?
Who Can Use a Correspondent Lender?
Correspondent lenders typically have relationships with a wide variety of investors. This means that for all kinds of purchases, be it a VA loan, single-family home purchases, or an investment purchase, your lender will most likely have an investor match.
What Is the Difference Between Wholesale and Correspondent Lending?
Wholesale lenders, such as banks and financial institutions, traditionally do not work directly with borrowers. They instead offer loans through third parties, such as mortgage brokers, online mortgage lenders, credit unions, or correspondent lenders who originate, underwrite, fund, and service the loan.
What Are the Differences between Correspondent and Direct lenders?
When correspondent lenders go to sell a mortgage loan after closing, they can sell to direct lenders. This will be the entity that services the loan and collects monthly payments from the borrower. Borrowers can also go directly to direct lenders who will keep the loan in-house and service it themselves. The downside to going with direct lenders is that they may not offer as many loan options as a correspondent lender.
Correspondent Lender vs. Mortgage Broker: The Differences that Matter
There is often a lot of confusion surrounding correspondent lenders and mortgage brokers. The main difference comes down to underwriting and funding.
Mortgage brokers: The borrower fills out their loan application with a broker, and the broker sends this application out to investors, who will then underwrite and fund the loan. Think of a mortgage broker as a matchmaker. They will help you compare lenders and get the best deal.
Correspondent lenders:The borrower fills out their loan application, and the correspondent lender underwrites and funds the loan themselves. Once closed, the correspondent lender sells the loan on the secondary market to the entity that will be the loan servicer – this is who collects your monthly mortgage payment and manages your escrow account.
>> More: Understanding Government Home Loans
Bottom Line: Correspondent Lending
Correspondent lending is one type of lending structure in which the lender will process, underwrite, and fund a loan. After closing, they will sell the mortgage note to a mortgage investor, who will service the loan. The advantage of working with a correspondent lender is the wide variety of loan options available, speed of closing, and flexible terms. As with any loan, it’s important to have a complete picture of the different fees and costs associated with choosing the right financing option for you.