Home buyers and owners have the challenge of acquiring and managing what will likely be the most expensive asset they will ever own. An intelligent approach to this involves careful monitoring of cash flow and an accurate assessment of home value. Getting the best deal on a home mortgage is central to keeping monthly outflow in check. How can you know what the best deal is? Lowest interest rates? Fewest fees? Superior servicing? An interesting fact is that the nature of the home loan has much to do with the type of lender involved. Correspondent lenders have their own way of doing business.
What Is a Correspondent Lender?
Some borrowers get mortgages from community and national banks, finance companies or credit unions. Each of these institutions has its own set of rules, guidelines and manner of governance. Yet there are other categories among which these businesses may or may not be included. Such groupings include direct lenders, portfolio lenders, wholesale lenders and warehouse lenders. Retail lenders, for example, make loans to consumers without a middleman or intermediary. Portfolio lenders use their own money exclusively and hold mortgage loans, often servicing them as well. In brief, financial institutions could fit into more than one of these classifications.
Some of these firms are known as correspondent lenders. These are initial lenders that interface with mortgage applicants. In nearly every case, however, these lenders will sell the loan after it closes to a bank or institution known as a sponsor, wholesaler or investor. Many of the larger banks in the U.S. serve as sponsors who buy correspondent lender mortgages. They will, in turn, re-sell the same mortgages to the secondary market, e.g. Fannie Mae and Freddie Mac. Key to understanding a correspondent-issued mortgage is to know where the correspondent stands with its investors.
What Makes Correspondent Loans Different?
Correspondents frequently have lines of credit with warehouse banks. Upon closing a mortgage and disbursing funds, the correspondent relies on the sale of the loan to replenish the available balance with the warehouse. This way, the lender can go on to make more loans. Accordingly, the correspondent must adhere to the sponsor's criteria for purchasing mortgages. These standards are often numerous and sometimes quite strict. They touch on acceptable insurance coverage; the size of the loan amount relative to property value; consumer debt relative to income; properly formatted documents and notarizations; accurate and timely disclosures; and acceptable forms of employment verification, to name just a handful of non-negotiables. If such guidelines go unmet, the correspondent may be stuck with holding and servicing the loan itself, shrinking its own credit line and burdening its staff with the problems of payment and collection.
Because the correspondent is accountable to the investor, the processing, underwriting and closing of the mortgage might take some time, especially if the lender-wholesaler relationship is relatively new. Yet the great advantage of going with a correspondent lender is that it can offer a variety of loan products, as varied as the number of investors to whom the lender sells. Should a customer fit uneasily into one type of mortgage, the correspondent can often find a similar loan with another wholesaler that is friendlier to that applicant. In this sense, the correspondent acts like a mortgage broker except that it is advancing its own money when the loan closes. This way, an applicant need not launch an extended search for the bank that will be most likely to approve. The correspondent does it for you.
Many states require correspondent mortgage lenders to be licensed. Confirm that yours is properly certified.