What Are the Main Types of Mortgage Lenders?
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
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
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
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.