What Is a Correspondent Lender?

What Is a Correspondent Lender?

A correspondent lender is a mortgage lender that initially funds a mortgage loan and then sells the loan to a sponsoring investor. The investor might bundle the mortgages it buys from correspondents and sell the bundle as a mortgage-backed security.

Although that might sound complicated and perhaps like something you'd want to avoid, it's very common in the mortgage industry—about one-fifth to one-third of all mortgage originations come from correspondent lenders.

There are two types of correspondent lenders:

• Delegated correspondents: Have authority from the investors to originate, underwrite, close and fund the loan.
• Non-delegated correspondents: Can originate, close and fund a mortgage loan, but the investors underwrite the loan—the in-depth verification process that happens behind the scenes before your application gets approved or denied.

In either case, as a homebuyer, you'll be working with the correspondent who will help you prepare your application and compare your loan offers.

Depending on the investors they work with, correspondent lenders may be able to offer you different types of mortgages and terms. These could include Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) home loans. The FHA and VA don't directly fund the loans, but they may buy existing loans from correspondent lenders who work with the homebuyers. Similarly, correspondent lenders fund loans that end up getting sold to Fannie Mae and Freddie Mac.

Correspondent Lender vs. Mortgage Broker

Correspondent lenders and mortgage brokers are both third-party originators, meaning they can help connect you to different types of loans. But one big difference is that correspondent lenders also fund the loan.

Correspondent Lenders

When you work with a correspondent lender, the money you give the seller comes from the correspondent lender. Behind the scenes, however, correspondent lenders often take out a short-term loan from a line of credit to fund your mortgage. They'll then use the proceeds from selling your mortgage to repay their loan, making money on the difference between the two transactions and by charging borrowers fees.

Mortgage Brokers

Mortgage brokers help connect borrowers with lenders and get a commission for their work. Similar to correspondent lenders, you might work with your broker to prepare your documents and apply for the mortgage. The broker also might shop around to help you find the best type of loan and rates. But once you choose a mortgage, the lender that the broker connects you to will underwrite and fund your loan.

Correspondent Lending Example

Let's run through how working with a correspondent lender might unfold. In this example, a first-time homebuyer is looking for a home and their realtor suggests a correspondent lender. The homebuyer meets with the lender and explains that they don't have enough for a 20% down payment and that their credit is good, but not great.

After asking for some basic identity and income information and running a credit check, the lender preapproves the buyer for a mortgage. The correspondent lender suggests a conforming loan from one of its investors—a mortgage that will meet the Fannie Mae or Freddie Mac underwriting guidelines.

Once the buyer finds a home and their offer is accepted, the correspondent lender can double-check with all its investors to find the best loan offer. As a delegated lender, it will also complete the underwriting and lending.

Some correspondents will service the loan after selling it—collecting payments from you and forwarding them on to the current loan owners. However, the servicing may also be handed off to the investor or a different third party.

Pros and Cons of Correspondent Lenders

It's always a good idea to speak with several people before taking out a mortgage. A correspondent lender might be one of the options, but consider the pros and cons.

Pros

• Can gather multiple offers for you: Correspondent lenders may work with various investors and can shop for loan offers on your behalf. They may also have access to types of mortgages that you won't find if you only work with one lender.
• Fewer intermediaries to deal with: When you work with a delegated correspondent, you're working directly with the lender that will approve and fund your loan.
• Could offer a relatively quick close: A delegated correspondent lender might have approved appraisers in the area and a good sense of the closing timeline since they're responsible for the underwriting.

Cons

• Might not be best for every type of loan: Some mortgage lenders might not work with correspondents or only offer a limited selection of loans through third-party originators.
• Could be costly: Correspondent lenders might charge higher fees than other types of lenders.
• Non-delegated correspondents have limited control: If you work with a non-delegated correspondent, your loan underwriting and approval depends on the sponsoring investor's decision.

Alternatives to Correspondent Lenders

The two primary alternatives to working with a correspondent lender is to work with a retail lender or a mortgage broker.

Retail Lenders

Retail lenders are financial institutions that offer mortgages to consumers, such as banks, credit unions, online lenders and non-bank lenders. Banks and credit unions may also offer you credit cards, checking accounts and other financial products, and discounted closing costs or a lower interest rate if you have, or move, lots of money into accounts at the company.

You'll work with a mortgage loan officer from the company to apply and compare loan options, but you'll be limited to the mortgage offering from that specific lender. Some lenders might offer more favorable loan terms when working directly with borrowers. And if the lender plans to keep rather than sell the loan—called a portfolio loan—it can also set its own underwriting criteria.

Mortgage Brokers

Mortgage brokers are intermediaries between borrowers and lenders. Although adding another person to the process might lead to potential delays, some mortgage brokers do a great job of helping you find a good loan and recommending lenders that close quickly.

It might make sense to work with a mortgage broker or correspondent lender if you're looking for a conventional loan—non-government backed loans. However, you might receive better offers directly from a retail lender if you're looking for a non-conventional loan, such as a jumbo loan.

Prepare Your Credit for Buying a Home

No matter which type of lender or professional you work with, your credit history and scores can be an important factor in your mortgage approval and loan offers. Review your credit history and see if improving your credit could be important before putting in an offer. You can get your credit score and credit report for free from Experian, and log in to your account to see which factors are helping or hurting your score the most.