Correspondent Lending Versus Mortgage Brokers For Borrowers
In this blog, we will discuss and cover the difference between correspondent lending versus mortgage brokers. One of the most frequently asked questions we get daily is the question of which type of lender gives the best rates. The answer is very simple. Borrowers will get the best mortgage rates and terms from mortgage brokers versus mortgage bankers and/or correspondent lending mortgage companies.
What Does Correspondent Lending Mean?
There are various types of mortgage companies for borrowers to choose from. Many have heard the term correspondent lending or correspondent lenders. Correspondent lenders are smaller mortgage lenders that normally piggyback off larger mortgage bankers. Technically, correspondent lenders are considered mortgage bankers. Smaller correspondent lenders are often referred to as mini-correspondent lenders. They use their own money through a warehouse line of credit to originate and fund loans to their borrowers. Correspondent lenders will close and fund loans using their own name and warehouse line of credit.
How Does The Correspondent Lending Mortgage Process Work?
Once they fund and close the loans, the correspondent lender will sell the loans they fund to the larger mortgage banker they have an association with correspondent lending. The larger mortgage banker will then purchase funded loans from a bunch of correspondent lenders and sell these loans to institutions and/or Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are the two mortgage giants in the United States.
What Is The Role of Fannie Mae and Freddie Mac in the Mortgage Industry?
The role of Fannie Mae and Freddie Mac is to provide liquidity in the mortgage markets by purchasing loans on the secondary market by mortgage bankers. Mortgage bankers count on selling the loans they fund on the secondary market so they can pay their warehouse line of credit and fund more loans. This is how mortgage lenders are able to offer home mortgages at low rates
The Correspondent Lending Process Explained
Correspondent lending is when a mortgage company piggyback off a larger mortgage banker and sell the loans they originated and fund to the larger mortgage banker after the loan closes and funds. Correspondent lenders will team up with larger mortgage bankers to sell their loans once they fund the loans. The larger mortgage bankers will buy loans from several correspondent lenders or mini-correspondent lenders.
How Correspondent Lenders Sell Loans They Fund to Larger Mortgage Bankers
Once they buy enough loans from their correspondent lenders, they will sell the loans to an aggregate larger institutional lender like Fannie Mae and Freddie Mac on the secondary market. Correspondent lenders are different than mortgage brokers. Correspondent lenders use their warehouse line of credit to originate and fund loans under their name. There are two different types of correspondent lending. Delegated and non-delegated underwriting.
Delegated Versus Non-Delegated Correspondent Lending
Delegated underwriting is when the correspondent lender has its own mortgage underwriters. Non-delegated underwriting is when a correspondent lender has the larger mortgage banker underwrite the loan. Delegated underwriting is when the correspondent lender will have their mortgage underwriter follow the guidelines of an investor who plans on selling the loan after it funds.
Selling Loans To The Larger Mortgage Banker
Once the mortgage loan is sold to the investor, the investor normally buys the loan and retains the servicing rights. The mortgage servicer sends out statements and collects the monthly principal and interest payments as well as the escrow payments of borrowers. Correspondent lenders can be small with just a few employees and licensed in a few states. Or they can be larger mortgage companies with hundreds or thousands of employees and licensed in dozens of states.
Correspondent Lending Mortgage Process
There are many benefits for mortgage brokers to become mini-correspondent and/or correspondent lenders. You do not have to be a large mortgage company to become a correspondent lender. Many correspondent lenders have just a few employees and are licensed in just one or a few states.
The Role of Mortgage Brokers
Mortgage brokers are licensed professionals who have indirect lending relationships with wholesale lenders. Mortgage brokers do not use their own money to fund loans they originate. Correspondent lenders have a warehouse line of credit to originate and fund loans. Correspondent lenders close loans under their company name. Mortgage brokers have access to as many wholesale mortgage lenders they want to sign up with. We will go into greater detail about why going with a mortgage broker is best versus mortgage bankers and/or correspondent lenders.
How The Correspondent Lending Cycle Works
Once they close and fund loans using their warehouse line of credit, the correspondent lender will sell the loans to a larger mortgage investor. Correspondent lenders will underwrite the loans under the guidelines of the investor the correspondent lender plans on selling the loan after it funds. Once the larger mortgage investor buys the loan from the correspondent lender, the lender will pay down the banking warehouse line of credit so they can originate and fund more loans. The wholesale mortgage investor will buy more loans from other correspondent lenders and package them up and sell them to institutional investors like Fannie Mae and/or Freddie Mac.
Advantages Of Being A Correspondent Lender Versus A Mortgage Broker
Mortgage brokers are capped at making no more than a 2.75% yield spread premium. However, mortgage bankers and correspondent lenders can make above and beyond the 2.75% yield spread premium cap that mortgage brokers can make. 2.75% is not much for a mortgage company to cover its commissions to loan officers, and overhead. If you are a mortgage banker and/or correspondent lender, you do not have to disclose the yield spread premium on the Closing Disclosure (CD).
How the Mortgage Industry is Heavily Regulated
Mortgage regulators exempt lenders from disclosing how much they make on each loan transaction because lenders use their own names and own funds to close on their loans. As a correspondent lender, you have full control of operations unlike being a mortgage broker. The negative of dealing with correspondent lenders is the rates may be higher than dealing with a mortgage broker. The more money the lender makes on the back end, the higher the mortgage rates. However, there are correspondent lenders who are rate sensitive and do not have a high back-end comp plan. Therefore, their rates will be competitive to mortgage broker’s mortgage rates and terms.
Difference Between Mortgage Brokers Versus Correspondent Lending
What is the difference between mortgage brokers versus mortgage bankers? Both mortgage brokers and mortgage bankers originate home mortgages for clients who need a home purchase or refinance mortgage. They both have the same type of licensing. Borrowers can get a mortgage from a mortgage broker or a mortgage banker. There is no difference between getting a home mortgage from a mortgage broker or mortgage banker for a borrower. They both lend on home loans to consumers. They both need to be licensed and are regulated. However, understanding the differences between a mortgage banker and broker can save borrowers time and money when shopping for a mortgage.
Shopping For A Mortgage
Many homebuyers, especially first-time home buyers, go to their local bank to apply for a mortgage loan. Banks are not mortgage brokers. Banks are mortgage bankers and lend with their own money. Borrowers with less than perfect credit are often told that they do not qualify for a mortgage loan at a bank. Bank have higher lending requirements than other mortgage companies.
Mortgage Bankers and Correspondent Lenders are Captive Mortgage Companies
Not all lenders have the same lending requirements on government and conventional loans. All lenders need to make sure their borrowers meet the minimum agency guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac. Lenders can have higher lending requirements above and beyond the minimum agency guidelines. This higher lending standard that is above and beyond the minimum agency guidelines is called overlays.
The Reason Why Using Mortgage Brokers Will Give You Access To More Mortgage Loan Options
Lenders have lender overlays to lower their risk tolerance on government and conventional loans. There are lenders that have no lender overlays. Understanding agency mortgage guidelines are important for borrowers. FHA, VA, USDA, Fannie Mae, Freddie Mac has their owner agency guidelines.
The Importance of Understanding Agency Mortgage Guidelines Versus Lender Overlays
Understanding agency guidelines is especially important for borrowers with less than perfect credit. Borrowers with less than perfect credit, bad credit, outstanding collections and/or charged-off accounts, and other derogatory credit tradelines can definitely qualify for a mortgage if they meet the minimum agency guidelines. However, they may not qualify for a mortgage at any lender. If they are told they do not qualify for a mortgage from one lender does not mean they cannot qualify for a mortgage at a different lender. If a borrower is told they do not qualify at one lender due to their overlays, they need to find a lender with no lender overlays that will just go off the minimum agency guidelines.
What Are Government-Backed Mortgages?
Government and conventional loans have its own agency guidelines lenders need to meet. There are three types of government loans.
- FHA Loans
- VA Loans
- USDA Loans
How Do Government Mortgages Work in the Mortgage Process?
Government-backed loans are originated and funded by lenders. Government loans are partially guaranteed and insured by a government agency (FHA, VA, USDA) in the event if the borrower were to default and/or foreclosure on the government-backed loan. The government agency has nothing to do with the origination, process, underwriting, and funding of government-backed mortgages.
Why Government Loans Have Lenient Guidelines and Low Down Payment Requirements
Lenders are more than eager to originate and fund government loans at lower and/or no down payment and low mortgage rates due to the government guarantee. FHA, VA, USDA will partially guarantee and insure the loss sustained by lenders in the event borrowers default and/or foreclose on the government loan. However, in order for the government agency to insure on the government loan, lenders need to follow the agency mortgage guidelines. FHA, VA, USDA will not insure any government loan that did not meet its guidelines.
How Fannie Mae And Freddie Mac Govern The Lending Requirements on Conventional Loans
Fannie Mae and Freddie Mac are the two that is the two largest purchasers of mortgages in the United States. Both Fannie Mae and Freddie Mac are government-sponsored enterprises (GSE). The role of Fannie Mae and Freddie Mac is to provide liquidity to lenders by purchasing mortgages they originate and fund.
Are Conventional Loans Backed by a Government Agency?
Conventional loans are not government-backed mortgages. Lenders originate and fund conventional loans. But why do conventional loans need to meet Fannie Mae and Freddie Mac Agency Guidelines if they are not government-backed mortgages? The reason is that Fannie Mae and Freddie Mac will not purchase conventional loans that do not conform to their lending requirements. This is why conventional loans are often referred to as conforming loans.
What Are Conforming Loans?
Fannie Mae and Freddie Mac only purchase mortgages that conform to their agency lending guidelines. Lenders use their warehouse line of credit to originate and fund conventional loans. Once the loan is funded, they need to sell the loan on the secondary market. The purchaser of the mortgage on the secondary mortgage market can be a larger mortgage lender or it can be Fannie/Freddie directly. The buyers on the secondary market will not purchase mortgages that do not conform to Fannie/Freddie Agency Guidelines. Once the loan is sold, lenders pay down their warehouse line of credit so they can originate and fund more loans.
Why It Makes Sense to go with Mortgage Brokers Versus Mortgage Bankers
Lender Overlays are additional mortgage guidelines that go beyond the minimum agency lending guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac. HUD, the parent of FHA, requires a 580 credit score for a 3.5% down payment home purchase FHA loan (mortgage lending guidelines). However, most banks, credit unions, and mortgage bankers will require a higher credit requirement from their clients. Most lenders will require a 620 credit score or higher on FHA loans. This holds true even though HUD Agency Guidelines require a 580 FICO.
Why One Lender Have Higher Lending Requirements than a Different Lender on FHA, VA, and Conventional Loans
The higher credit score requirement by lenders on FHA loans is called lender overlays. It is perfectly legal for mortgage bankers to have a higher credit score requirement as well as other lender overlays. Most lenders will have lender overlays on government and conventional loans.
No Lender Overlays Mortgage Companies
Gustan Cho Associates has a national reputation of not having any mortgage lender overlays on government and conventional loans. As long as borrowers can get an approved eligible per Automated Underwriting System and can provide the documents verifying whatever stated mortgage application, we will close on the home loan
Role Of Mortgage Brokers in Comparison to Correspondent Lenders
The difference between mortgage brokers and mortgage bankers is brokers do not use their own funds to fund the home loan. Mortgage brokers have relationships with wholesale lending partners. Mortgage brokers can be associated with many third-party wholesale mortgage lenders. Mortgage brokers can have relationships with multiple wholesale lenders. Some may have relationships with dozens of lenders. How do mortgage brokers get paid?
Compensation of Correspondent Lending Versus Mortgage Brokers
Mortgage brokers get paid a commission by lenders via yield spread premium. Yield spread premiums are disclosed on the closing disclosure. The amount brokers get paid depends on the comp plan they set up with the particular lender. The maximum compensation a mortgage broker can get paid by law is no more than 2.75%.
Who Has Lower Mortgage Rates: Mortgage Brokers or Mortgage Bankers?
Mortgage brokers have comp plans of 2.5% to 2.75%. The higher the comp plan mortgage brokers set up with their wholesale mortgage lenders, the higher the mortgage rates the borrower will be given. Brokers who want to give their borrowers the best mortgage rates, especially brokers who specialize in refinance mortgage loans, may set a borrower-paid comp plan of 2% or less.
Mortgage Company Compensation Plan is What Determines Rates For Consumers
The lower the comp plan, the lower the mortgage rates. Mortgage bankers charge generally 4% to 10% on the back end. Mortgage bankers and correspondent lenders do not have to reveal their comp plan because they use their warehouse line of credit to fund the loans. The most mortgage brokers can charge by law is 2.75%. The 2.75% is called the yield spread premium (YSP) and needs to be disclosed on the Closing Disclosure.
Mortgage Brokers Are Limited on How Much Their Compensation Can Be: Not Mortgage Bankers and Correspondent Lenders
The maximum a mortgage broker can charge a borrower by law is 2.75%. The higher the lender’s comp plan, the higher the rate to the borrower. At 2.75%, borrowers will get a very low mortgage rate compared to mortgage bankers. Comp plan on mortgage bankers does not have to be disclosed to borrowers.
Mortgage Bankers and Correspondent Use Their Warehouse Line of Credit To Fund Loans
Mortgage bankers use their own money to fund loans. Under federal law, if you use your own money to fund a mortgage loan, you do not have to disclose the comp made on the loan. Mortgage bankers normally have substantially higher comps than mortgage brokers. Mortgage rates are much higher when dealing with a mortgage banker versus a broker.
Role Of Mortgage Bankers and Correspondent Lenders Versus Mortgage Brokers
Mortgage bankers, like mortgage brokers, originate home loans. However, they will fund the loan under their names using their warehouse line of credit. Mortgage bankers have wholesale lending partners. These wholesale lending partners are the investors that will purchase the mortgages they fund using their warehouse line of credit.
Delegated Versus Nondelegated Underwriting
The lender can have a delegated or nondelegated underwriting relationship with the wholesale lending partner. Delegated mortgage underwriting means the lender has its own in-house mortgage underwriter. The in-house mortgage underwriter will underwrite the loan under the strict guidelines of the wholesale lending partner’s guidelines.
Selling The Funded Loan on the Secondary Mortgage Market To Pay Down the Warehouse Line of Credit
Once the loan funds, the lender’s mission is to sell the funded loan as soon as possible on the secondary mortgage market. No lender wants to be stuck holding the loan. Mortgage bankers and correspondent lenders will aggressively want to sell the loan to a larger mortgage banker so they can reuse the warehouse line of credit.
Delegated Versus Nondelegated Mortgage Bankers and Correspondent Lenders
Nondelegated correspondent lenders will sell the funded loan to the mortgage banker who did the underwriting. Nondelegated lenders do not underwrite the loan they originated. The lending partner which the in-house underwriter has underwritten using their guidelines does the underwriting. Once the wholesale lending buys the loan, the lender will pay down their warehouse line of credit and make more loans. This cycle repeats itself over and over again.
How Mortgage Bankers Operate
Mortgage bankers normally sell loans to wholesale lending partners which are larger mortgage companies. They may also sell loans to banks, insurance companies, financial institutions, or even Fannie and/or Freddie Mac. Mortgage Bankers are lenders who normally do not broker out mortgage loans to third-party wholesale lenders.
How Mortgage Bankers and Correspondent Lending Works
Mortgage bankers are lenders who use their own funds or use a warehouse line of credit to fund their borrower’s mortgage loans. Once the mortgage banker funds the borrower’s mortgage loans, they then package the mortgage loans that they have funded. They resell them to the secondary market. This is so they can relieve their warehouse lines of credit so they can fund more mortgage loans for new borrowers. Mortgage bankers do not have to disclose yield spread premium but mortgage brokers do. Yield Spread Premium is the amount of money mortgage brokers make as their compensation.
Who Should I Choose?
Mortgage Bankers normally market their own loan programs and set up their own mortgage lending guidelines. Due to more overhead than brokers, mortgage rates and fees on mortgage bankers are higher than mortgage brokers. Mortgage brokers often offer lower mortgage rates than bankers. Mortgage bankers normally can offer government and conventional loans. Mortgage brokers can have dozens of relationships with wholesale lending partners that specialize in alternative financing mortgages such as non-QM loans, bank statement mortgages, asset-depletion, fix and flip loans, and countless other mortgage programs.
Comparison of Mortgage Bankers and Correspondent Lenders Versus Mortgage Brokers
Other aspects of mortgage banker versus broker are the following:
- For example, mortgage bankers may have lending overlays on credit scores
- Mortgage bankers set their own lender overlays
- They may not accept mortgage borrowers with credit scores under 620 FICO
- However, mortgage brokers may have access to a lender where the lender may accept borrowers with credit scores of under 620 FICO
- The advantage of mortgage brokers is that if a borrower gets denied by one lender, they can submit the file to a different lender
- With mortgage bankers, if the borrower gets denied by one lender, then the broker has the luxury to resubmit the borrower’s loan application to a different lender with fewer overlays
Many mortgage bankers do have the ability to be able to broker mortgage loans. These mortgage bankers can be mortgage bankers and mortgage brokers at the same time.