Correspondent Lending Versus Wholesale Lending By Mortgage Brokers

by Gustan Cho

This Article Is On Correspondent Lending Versus Wholesale Lending By Mortgage Brokers

Understanding the difference of Correspondent Lending Versus Wholesale Lending By Mortgage Brokers. Most borrowers will consult with a licensed loan officer when they need to apply for a mortgage. However, not too many consumers know whether the loan officer works for a correspondent lender or a mortgage broker. Does it really matter where the loan officer works for a correspondent lender, mortgage broker, bank, credit union?  Not really. All of these financial institutions are loan originators and can qualify and pre-approve borrowers for a home loan. Not all these financial institutions may have the same lending requirements on FHA, VA, USDA, and Conventional loans. Not all of these lenders may offer non-QM and alternative financing loan programs. However, all of these financial institutions are licensed and/or registered to originate and close mortgages and are highly regulated. In this article, we are going to take a step further and explain to our viewers on the difference between correspondent lending versus wholesale lending by mortgage brokers and how this affects borrowers.

Understanding What Correspondent Lending Is

What Correspondent Lending Is

Many have heard the term Correspondent Lending. However, many do not know the true definition of correspondent lending. This holds true for loan officers, homebuyers, home sellers, realtors, and other third-party professionals.

Below are the bullet points about correspondent lending we will cover and explain in this blog:

  • The definition of correspondent lending
  • Does the borrower benefit from working with a correspondent lender over a mortgage broker?
  • Which type of mortgage company is better for me
  • What is the difference between correspondent lenders and mortgage brokers

By the time you are finished reading this blog, you will fully understand the difference between correspondent lenders versus mortgage brokers and how each operates. Understanding the mortgage process and how different types of lenders operate will make the home buying and mortgage process easier and less stressful.

Correspondent Lenders Defined

We published a detailed blog about the difference between mortgage brokers versus mortgage bankers a few weeks ago on Capital Lending Network. A correspondent lender is a mortgage banker. Mortgage bankers originate, process, underwrite, and fund mortgage loans using their company name. Mortgage bankers will fund the loans they close using their warehouse line of credit. Mortgage bankers will sell the loans they fund on the secondary mortgage market. Mortgage bankers will then pay off their warehouse line of credit so they can originate more loans. This is how the mortgage banking system works. The term mortgage banker is very broad. A mortgage banker can be a giant-sized lender or it can be a small mom-and-pop shop with a small number of employees.

Relationship Of Correspondent Lenders And Wholesale Mortgage Bankers

Correspondent lenders are smaller lenders that have a wholesale lending relationship with larger mortgage bankers. All correspondent lenders have a warehouse line of credit. They originate, process, underwrite, and fund mortgage loans to the guidelines of the wholesale mortgage banker they are in a partnership with. Correspondent lenders can have delegated and non-delegated relationships with the main larger wholesale mortgage banker. Delegated underwriting is when the correspondent lender has their own in-house mortgage underwriter process and underwrites the loan to the main mortgage banker’s lending guidelines. non-delegated underwriting is when underwriting is done by the underwriter of the larger mortgage banker. If the non-delegated mortgage underwriter made a mistake underwriting a loan, the correspondent lender normally does not have any liability if the loan is bad. The correspondent lender does not have to buy it back. However, if the loan was a delegated underwriting mortgage and the underwriter made a mistake after its funds, the wholesale mortgage banker will not buy the loan. The correspondent lender needs to keep the loan because it is considered a bad loan. Bad loans that are not saleable are categorized as scratch and dent loans. Most correspondent lenders will get rid of scratch and dent loans on the secondary mortgage market at a steep discount.

Correspondent Lending Relationship With Larger Mortgage Bankers After The Loan Funds

Are correspondents' borrowing relationships with major mortgage banks after loan funds important?

When the loans close, the correspondent lender will fund the loan using their warehouse line of credit. Once the loan is funded, the loan is then sold to the main wholesale mortgage banker. The larger wholesale mortgage banker will have no problem buying the loans funded by the correspondent lender. This is because the mortgage underwriter followed the detailed guidelines and overlays of the larger wholesale mortgage banker. The wholesale mortgage banker will fund the loan and keep the mortgage servicing rights on the loans they purchase. This holds true with non-delegated underwriting loans. Underwriters from the wholesale mortgage banker underwrite non-delegated mortgages.

Delegated Versus Non-Delegated Underwriting

Delegated underwriting are loans that were underwritten by mortgage underwriters of the correspondent lender. The main wholesale mortgage banker works with many correspondent lenders where they purchase their loans. As they purchase loans from other lenders, the wholesale mortgage banker will keep the servicing of the loans they buy. The wholesale lender will then bundle up all the loans they purchase and resell them to a larger aggregator such as Fannie Mae and/or Freddie Mac, hedge funds, credit unions, larger banks, insurance companies, or other larger financial institutions.

Difference Between Correspondent Lenders and Mortgage Brokers

Mortgage brokers have lending relationships with wholesale lenders. The benefit of being a mortgage broker is they can have lending relationships with as many wholesale lenders as they want. Mortgage brokers are able to originate and close nontraditional loans that correspondent lenders cannot do. For example, mortgage brokers can close on non-QM loans such as bank statement mortgages, mortgage one day out of bankruptcy and foreclosure, ITIN loans, fix and flip loans, and other unique mortgage programs. Mortgage brokers do not use their own funds to close loans. The loans mortgage brokers close are under the name of the wholesale lender. The wholesale lender funds all loans that are originated from mortgage brokers. The maximum compensation a mortgage broker can make on a mortgage transaction is 2.75%. The mortgage broker compensation needs to be disclosed on the closing disclosure. The broker’s compensation is referred to as the yield spread premium (YSP).

Mortgage Rates Of Correspondent Lenders Versus Mortgage Brokers

Correspondent lenders can charge more than 2.75% commission on a mortgage transaction. However, correspondent lenders do not have to disclose their compensation on the closing disclosure. Since they are using their own name and funding the loans they close, they are exempt from disclosing their compensation. Correspondent lenders often charged more than 2.75% on each transaction due to having a higher overhead than mortgage brokers. The higher the back-end compensation, the higher the mortgage rates to the borrower.

Compensation Of Mortgage Brokers On Lender Versus Borrower Paid Compensation

Mortgage brokers can get borrowers even lower rates if borrowers go borrower-paid versus lender-paid. For example, in order to get better rates than the mortgage broker is offering, the mortgage broker needs to lower their 2.75% compensation plan lower. There are strict regulations on mortgage broker comp plans. If your compensation plan is set at 2.75%, you need to keep it at 2.75% for the whole mortgage broker office. You cannot lower it for one borrower and not the other. Therefore, a mortgage broker can convert a borrower into a borrower-paid transaction and charge 2% or under versus at 2.75% lender-paid commission which is already built in to the rate. Remember, the higher the comp plan, the higher the mortgage rates to the consumer. Therefore, most correspondent lenders and mortgage bankers have higher rates than mortgage brokers.

Benefits Of Using Mortgage Brokers Versus Correspondent Lending

What are the benefits of using the services of mortgage brokers and correspondent loans

Most correspondent lenders only originate and fund government and conventional loans. A correspondent lender can have correspondent relationships with many larger traditional mortgage bankers. They can enter into correspondence relationships with larger mortgage bankers, credit unions, and other larger financial institutions that may have more lenient guidelines for their borrowers. Mortgage brokers can benefit borrowers with less than perfect credit or those who have a hard time qualifying for traditional government and conventional loans. If you have less than perfect credit, lower credit scores, recent late payments, recent bankruptcy and/or foreclosure, or other unique situation, a mortgage broker may benefit you more than a mortgage banker.

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13 comments

Lisa Brown Jones November 27, 2020 - 12:07 am

I’m looking to buy a home in Blue Springs, Mo. I thinking of a loan at a purchase price of 150,000 to 200,000 would be good. I’m looking to move by June 2021. The only problem I’m having is that I am in my last year of a Chapter 13 bankruptcy and no one is willing to help me. My Husband’s credit is okay, but on paper, his income isn’t. I have a better income and It is holding us back. Can you please and thank you help me or point me in the right direction.

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Tina Ann Dallas November 27, 2020 - 12:09 am

My husband and I are looking for an FHA loan for a home we want to purchase in NJ. We are currently under contract on our home in MN and are planning to use the proceeds of the house for our down payment. We do have quite a bit of debt and was wondering what your DTI requirements are for FHA loans.

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Tina Ann Dallas November 27, 2020 - 12:10 am

My husband and I are looking for an FHA loan for a home we want to purchase in NJ. We are currently under contract on our home in MN and are planning to use the proceeds of the house for our down payment. We do have quite a bit of debt and was wondering what your DTI requirements are for FHA loans. I have been following Gustan Cho Associates and the blogs from their mortgage experts for many years. I even spoke with Gustan Cho several times and he gave me some great advice.

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DANNY VESOKIE November 27, 2020 - 12:14 am

Commercial Mortgages -NO TAX RETURNS – STATED INCOME.

Owner Occupied Business- funded up to 70 Max LTV

Mixed Use – Auto Repair – Retail

If you have a loan that a bank said NO or cannot by funded traditionally, send us the 1003 and Credit

CMD is a Direct Lender. Minimum Credit 650 Rates Determined by Credit Score. Lending in Top 50 MSA. No Rural. No Land.
Terms Vary: 5 year Fixed , 30 Year Fixed. Submit 1003, Credit, Income & Expense.

Property Types Funded : (Purchase and Refinance) Property Types: Multifamily And Mixed-Use (Residential) Office, Retail, Light Industrial, Self-Storage, Warehouse, Automotive, 3 Family,1-4 Family Investment

LTV & RATES BASED ON CREDIT SCORE, PROPERTY TYPE, BORROWER EXPERIENCE, PAYMENT HISTORY AND OTHER FACTORS. PLEASE SUBMIT 1003 AND TRI-MERGED CREDIT REPORT

LENDER: CAPITAL LENDING NETWORK, INC.

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Bill Washington November 27, 2020 - 12:16 am

I am about to sell my current home and trying to see if I am able to buy another one at the moment. I do have medical bills in collections and only a 600 credit score. I’m just trying to see where I stand.

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Lori Sullivan November 27, 2020 - 12:26 am

Hello my credit is in the mid or high 500 my credit is very poor I have three collections and he has none. His salary is 22/hr and mine is 16/hr. What would be the amount we can qualify for and what could the interest look like?

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Alex Carlucci November 27, 2020 - 2:02 am

If the employment of a mortgage loan originator licensee or principal manager licensee
is terminated, whether voluntarily by the mortgage loan originator licensee or principal
manager licensee; or by the loan broker licensee employing the mortgage loan originator
licensee or principal manager licensee; the loan broker licensee that employed the
mortgage loan originator licensee or principal manager licensee must notify the
Commissioner within 5 days after the termination and the reasons for termination

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Alex Carlucci November 27, 2020 - 2:03 am

To maintain a license, a person must provide to the Commissioner evidence that the
person has completed at least eight (8) hours of academic instruction that is approved
by the Nationwide Mortgage Licensing System and Registry during each calendar year
after the year in which the license was initially issued. The education must include the
following:
• Three (3) hours of federal law and regulations concerning residential mortgage
lending.
• Two (2) hours of ethics, including instruction on fraud, consumer protection, and
fair lending practices.
• Two (2) hours of training concerning lending standards for nontraditional
residential mortgage loan products.
• One (1) hour of undefined elective instruction.

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Joy Casey November 27, 2020 - 4:35 am

I am self employed and need a bank statement loan for a mortgage with 10 percent down.

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Alex Carlucci November 27, 2020 - 4:55 am

APPLYING AS A LOAN BROKER IN INDIANA
Applicants for a loan broker license must:
• Pay license fees, which are $100 for the NMLS processing fee, $200 for the application fee, $15 for the credit report, and $36.25 for the FBI Criminal Background Check;
• Submit a properly completed application (MU1) through the Nationwide Mortgage
Licensing System (NMLS).
• Submit an Electronic Surety Bond (ESB) via NMLS in the amount of $60,000 furnished and submitted by a surety company authorized to conduct business in Indiana. For applicants applying prior to October 31, the bond term should extend until the end of the year of application. For applicants applying after November 1 and before December 31, the bond term should extend until the end of the next calendar year.
• Pay $100 for each of the loan broker’s Ultimate Equitable Owners (“UEO”). The UEO is a person who, directly or indirectly, owns or controls ten percent (10%) or more of the equity interest in a loan broker licensed regardless of whether the
person owns or controls the equity interest through one (1) or more other persons or one or more proxies, powers of attorney or variances. This fee will be paid through the Agency Fee Invoicing (AFI) on the NMLS. The invoice amount
will be based on the direct and indirect owners listed on the MU1.
• Obtain an FBI background report for each UEO, including any directors, managers and officers, through NMLS.
• Individual Sponsorship – Principal Manager: A Principal Manager must be sponsored by the Loan Broker at the registered location. A Principal Manager may supervise up to five loan broker offices. A Principal Manager would need to
have a relationship created for every branch office that the Principal Manager is charged with supervising.
• Secretary of State Business Filing: A copy of the Corporate Charter or Articles of Incorporation (if a corporation), or the Articles of Organization and Operating Agreement (if a Limited Liability Company), or the Partnership Agreement (if a
partnership of any form).

By Alex Carlucci of Gustan Cho Associates

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Maria Pendleton December 1, 2020 - 3:13 pm

I run my business out of my home. I’m reacting a home and I’m outgrowing it. My business is picking up and I need more space to live and work.

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Kimberly Fordstrom November 9, 2021 - 5:07 am

Hi Gustan! You responded to my comment on a FB thread regarding my recent layoff at my company. I have attached my resume for your review. Just a brief summary on my background: started off in the industry in 1999 as a loan officer. Eventually making my way into processing. Have some brief underwriting exposure. My main skill set is in processing. I took a brief pause from the industry for 10 years after having my fourth child, recently returning to the industry late 2020. Thank you for taking the time to reach out to me and reviewing my resume. I look forward to the possibility of speaking with you.

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Gustan Cho November 9, 2021 - 2:35 pm

Hi Kim,

I would like to set up a zoom meeting with you. Here are some times I am available:

Monday, 11/08 – 10:30am, 12pm, 1pm or 3pm Eastern Standard time

Tuesday, 11/09 – 10:30am, 3pm, 4pm or 5pm Eastern Standard time

Wednesday, 11/10 – 10:30am, 12pm or 5 pm Eastern Standard time

Please let me know if any of these times work for you. Thank you!

Kind Regards,

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