Correspondent Lending: What It Is And How It Works (2024)

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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.

Pro Tip

Wholesale lenders fund and offer home loans to mortgage brokers and other third parties; they don’t work directly with borrowers.

Using a mortgage broker can be highly beneficial, especially if you’re looking for a specialized loan program or you want access to more lenders. A mortgage broker can also make it easier to compare offers and potentially find you better terms or rates.

Once you choose a loan, the broker will send your loan application to the lender, who will underwrite and approve or deny your loan.

“However, once a mortgage broker pairs a borrower with a lender, [the broker loses] the ability to control the loan process,” Christensen says. “This can lead to long delays, which is frustrating when dealing with time-sensitive transactions.”

Correspondent Lenders

Correspondent lenders are a mix between retail lenders and mortgage brokers. Like a retail lender, they approve and close the loan. But, like a broker, they also have relationships with multiple funding sources and access to a wide variety of loan programs.

The advantage of using a correspondent lender is its relationships with different investors who may have a variety of guidelines and pricing strategies, Hughes says.

Here’s how correspondent lenders compare to retail lenders and mortgage brokers in key aspects of the mortgage lending process.

Correspondent LenderRetail LenderMortgage Broker

Can connect borrowers with loans that have a variety of purposes and qualifications

Yes

Yes, but may offer fewer loan programs

Yes

Can help outside-the-box borrowers get qualified or pay less for a mortgage

Yes

Sometimes

Yes

Underwrites and approves or denies mortgage applications

Yes, if delegated

Yes

No

Provides the money to close the loan

Yes

Yes

No

Services your loan after closing

Sometimes

Sometimes

No

Applying for a Mortgage With a Correspondent Lender

Suppose you want to apply for an FHA loan with a correspondent lender. No matter which investor the correspondent lender matches you with, you’ll have to meet the FHA’s guidelines. For example, most borrowers need a credit score of at least 580 with a down payment of 3.5% to qualify for an FHA loan.

Working with a correspondent lender can be a more efficient way to get qualified and get a good deal on your mortgage. A correspondent lender, for instance, can pair you with the best priced investor whose standards you can meet.

In addition, when you work with a delegated correspondent lender—that is, a lender that fully underwrites the loan in-house—you may have an easier time resolving any issues that come up during the process, says Rob Wilson, senior vice president of correspondent lending at Merchants Bank in Indianapolis.

Pros and Cons of Using a Correspondent Lender

Working with a correspondent lender has advantages and drawbacks, though many of them aren’t unique; they can apply to other types of lenders, too.

Pros

  • Wide variety of loan programs. Correspondent lenders work with multiple investors, and each investor will offer several loan programs. This increases your chances of finding a mortgage that you can qualify for. A larger selection can be especially helpful for borrowers with unique financial situations who require non-conforming loans.
  • Easier price shopping. A correspondent lender’s many relationships also allow them to find you a more competitive interest rate and lower closing costs than you might on your own. Also, if interest rates drop after you’ve locked your rate, a correspondent lender may be able to renegotiate a lower rate for you with their correspondent investor.
  • Potential for a faster, smoother transaction. When you use a delegated correspondent lender, you’re working directly with the company that’s doing everything involved in underwriting and funding your loan. You may experience fewer delays and better customer service as a result.

Cons

  • Must meet investor standards. Since correspondent lenders always sell the loans they originate, the loans must meet their buyer’s standards—which in many cases are the Fannie Mae, Freddie Mac, FHA and VA standards that dominate the market. That said, correspondent lenders may have access to a wide range of specialty mortgages with different criteria, as well.
  • Non-delegated correspondents may be slower than delegated correspondents. Delegated correspondents handle all aspects of approving and closing loans, while non-delegated correspondents have to get the loan underwritten by the purchasing lender. Adding another entity to the mix could slow things down.
  • Your lender may not be your servicer. Your mortgage servicer is the company you send your mortgage payments to. After closing, a correspondent lender will sell your loan to an investor, and the investor might also sell the mortgage servicing rights. It can be disappointing as a borrower to choose a lender with good customer service, then find out you won’t get to work with them any longer.

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Correspondent Lending: What It Is And How It Works (2024)

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