Gustan Cho The Mortgage Expert,
Publish On: March 26, 2024
This article is on delegated versus nondelegated mortgage underwriting by lenders. We will cover the main difference between delegated and nondelegated mortgage underwriting. Many experienced loan officers still need to fully understand the difference between delegated versus non-delegated underwriting and versus being a mortgage broker.
Delegated underwriting is when the lender’s in-house mortgage underwriters underwrite the loan. Nondelegated underwriting means the mortgage banker to who the mini-correspondent lender is selling the loan to does the underwriting.
Both delegated, and nondelegated underwriting is for correspondent lenders and mortgage bankers. Mortgage brokers are not lenders, so they do not use their money to fund the loan. Mortgage brokers and mortgage bankers both originate home mortgages. Mortgage brokers and bankers must be licensed in the states where they originate loans. Mortgage bankers and brokers are professionals and need the same state licenses. They both need individual licenses in the states where they want to do business.
What Is Delegated Mortgage Underwriting?
The main difference between mortgage brokers and mortgage bankers is mortgage bankers use their warehouse line of credit to fund the mortgage loan they are originating. Mortgage brokers have lending relationships with wholesale lenders. Mortgage brokers can have relationships with dozens of wholesale lending partners. Now, with mortgage bankers, there are two different classes of mortgage bankers. One is a fully delegated mortgage banker where they do the underwriting in–house.
There is a huge advantage for being a lender versus a broker in mortgage lending. Mortgage brokers need to disclose the lender paid comp plan which goes into the 5% high-cost threshold. Lenders do not have to disclose the compensation plan because they are using their own funds to fund the loan.
The second type of lender is the non-delegated mini-correspondent lender. Nondelegated mini-correspondent lender normally gets the warehouse of credit from the fully delegated mortgage banker. Nondelegated mini-correspondent lenders do not have their own underwriting team. The fully delegated lender will underwrite the mini-correspondent lender’s borrowers. Once the loan closes, the nondelegated mini-correspondent lender will sell the loan to the fully delegated lender. Talk to an expert Loan Officer about mortgage loan
How Do Mortgage Brokers Work?
Mortgage brokers get compensated by wholesale lenders via yield spread premium (YSP). Loans mortgage brokers close are closed under the name of the wholesale lender. Mortgage brokers do not use their own money to fund the home mortgages they close. The maximum compensation a mortgage broker can make is a back-end yield spread premium of 2.75%.
Mortgage brokers need to disclose the mortgage broker’s compensation or yield spread premium. Mortgage Bankers do not. Mortgage bankers normally do not run into high-cost violations since the compensation does not have to get disclosed.
To avoid high cost, the mortgage broker need to keep all fees and costs under five percent. The 2.75% yield spread premium is a big hit towards the 5% high-cost rule. Therefore, problems do arise and in many cases, loan officers need to reduce the 2.75% compensation and go borrower paid. Mortgage broker compensation can be lender paid or borrower paid.
What Is Borrower-Paid Compensation By Mortgage Brokers
Mortgage brokers normally have a lender paid compensation plan of 2.75% which is called the yield spread premium. The lender paid compensation is whet the wholesale lender pays the mortgage broker for their commission. The higher the lender paid comp, the higher the rate. There are two types of compensation for mortgage brokers.
Loan Officers often take the borrower paid compensation plan because they can charge a lower comp or yield spread premium. The lower the yield spread premium, the lower the mortgage rates.
Borrowers can get raw pricing but would need to pay the mortgage broker as a borrower-paid transaction. Mortgage bankers have relationships with wholesale lenders as well. However, the type of relationship they have with wholesale lenders is different than the type of relationship mortgage brokers have. Mortgage bankers have a correspondent relationship with wholesale lenders.
Delegated Versus Nondelegated Mortgage Underwriting By Mortgage Bankers
Mortgage bankers have a different type of relationship with wholesale lenders. Mortgage bankers have a correspondent relationship with wholesale lenders. What this means is all mortgage bankers have a warehouse line of credit. Mortgage bankers will close the home loan under their name and fund the mortgage loan from the funds from their warehouse line of credit.
Delegated Correspondent Mortgage Underwriting
After the mortgage loan funds, the mortgage banker will sell the home loan they funded to the wholesale lender. The wholesale investor will retain the servicing rights of the loan they purchased by the mini-correspondent lender.
Being non-delegated mini-correspondent lender minimizes the risk of the funded loan not being saleable because the main mortgage banker underwrote the borrower. Once the loan funds, the mini-correspondent nondelegated lender with sell it right back to the lender who underwrote the file.
Once the mortgage banker sells the loan to the wholesale investor, the wholesale investor will package a bunch of loans they purchased. The wholesale lender will sell them to a larger secondary mortgage market like a larger mortgage bank and/or Fannie Mae and/or Freddie Mac.
How Loans Get Underwritten By Underwriters at Mortgage Brokers
Mortgage brokers and mortgage bankers both originate mortgages on home purchases and refinance home loans. For borrowers, it does not matter who they have originating their loans. Mortgage bankers do not have to disclose their yield spread premium like mortgage bankers.
There are benefits to both being mortgage brokers versus mortgage bankers. Mortgage bankers normally do not get penalized with high cost due to not being required to disclose the yield spread premium like mortgage brokers.
Both mortgage brokers and bankers are licensed professionals and have the exact same professional credentials. Mortgage brokers do not need to underwrite the loans they originate. Mortgage brokers do need to process the loans their loan officers originate. Click here to get qualify for mortgage loan
The Role of the Mortgage Processor
The mortgage processor is the most important person in the mortgage loan processor. The mortgage processor is the quarterback of the entire mortgage process. A great processor will not submit a file to underwriting until the file is complete, legible, and fully have gone through the file with a fine tooth comb.
It is the mortgage processor role to make sure all docs are legible with no missing pages and there are no missing pages. If the underwriter sees that a file is not legible, incomplete, or missing, the underwriter will kick it back. This is one of the main causes for delays in the mortgage process and closing date.
The mortgage processor of the broker will process a loan applicant. Once the borrower’s file has been processed, the mortgage processor will submit the file to one of the many wholesale lending partners is affiliated with. Once the file is submitted, a mortgage underwriter of the wholesale lender will get assigned to the file and underwrite the loan.
What Is The Role of Mortgage Brokers
Mortgage brokers need to be licensed. Mortgage brokers provide a valuable service to the public. In general, mortgage broker rates are lower than retail mortgage bankers. Mortgage brokers cannot charge more than a 2.75% yield spread premium. Most mortgage bankers charge over 5% in yield spread premium. The higher the yield spread premium, the higher the rate to the borrower.
Mortgage Brokers are licensed professionals and go into a written lending agreement with a wholesale lender. The wholesale lender will give mortgage brokers a commission or yield spread premium for their services. Mortgage brokers commissions are generally lower than retail mortgage lenders. Mortgage brokers provide an invaluable service to the public.
Mortgage brokers do not have in-house underwriters. In the event, that the mortgage underwriter denies the loan, the advantage of being a mortgage broker is they can submit it to another wholesale lender where a different underwriter will review and underwrite the file.
Difference Between Wholesale Versus Correspondent Lending
Once the mortgage underwriter at the wholesale lender issues a conditional loan approval, the file gets back to the processor at the mortgage broker. The mortgage processor will then gather conditions from the conditional loan approval. The mortgage processor will work together with the loan officer and borrowers in gathering conditions.
Clearing Conditions For Clear To Close From Mortgage Underwriter
Once all conditions have been gathered, the mortgage processor will submit the conditions back to the original underwriter for a clear to close. Once the mortgage underwriter issues the clear to close, the mortgage processor at the mortgage broker takes over again. The processor will work together with the closing department of the wholesale lender and coordinate the closing with the title company.
Mortgage Bankers’ Relationships With Wholesale Lending Partners
Mortgage bankers originate and fund loans under their name. Mortgage bankers have a warehouse line of credit. When they fund a loan, they use the funds from the warehouse line of credit to fund the loan. Once the lender funds the loan, they sell the loan on the secondary market.
Why do Mortgage Lender Have To Sell Loans To Investors
Most mortgage bankers sell the loans they fund to their wholesale lending partners which is a larger mortgage lenders. Once the lender receives funds from the sale of the loan, they will pay down the warehouse line of credit and make more loans. The larger mortgage company will retain the servicing rights and package up these loans from many smaller mortgage bankers.
What Happens After Mortgage Loan Gets Funded?
Once packaged up, the wholesale lender will sell these loans to financial institutions, hedge funds, insurance companies, or to Fannie Mae and/or Freddie Mac directly. Mortgage bankers have higher overhead than mortgage brokers. Mortgage bankers may or may not have in-house mortgage underwriters. Mortgage bankers have support and operations staff such as openers, processors, closers, secondary desks, lock desks, and other personnel.
What Does It Mean When a Bank Sells Your Mortgage?
Mortgage bankers do not have to disclose yield spread premiums or how much they make on each transaction like mortgage brokers. This is because they use their own money to fund loans. Due to higher overhead and not needing to disclose yield spread premium, mortgage bankers’ comp plan is substantially higher than the maximum of 2.75% YSP mortgage brokers make. The higher the compensation of the mortgage company, the higher the mortgage rates. Therefore, mortgage bankers normally have higher mortgage rates and fees than mortgage brokers.
Delegated Versus Nondelegated Mortgage Underwriting: Nondelegated Underwriting
Mortgage bankers can have delegated and nondelegated underwriting. Let’s recap. Mortgage bankers use their own funds from a warehouse line of credit to fund loans they close. Once they close, the lender will normally sell the loan to a wholesale lender they have a mini-correspondent relationship.
Do Mortgage Bankers Sell The Loan They Create?
When the wholesale lender buys the loan, the lender will pay down the warehouse line of credit so they can originate and fund more loans. The wholesale lender that buys the loan from the mortgage banker has its own guidelines and overlays. In order for the wholesale lender to purchase the loan that is funded by a lender, the lender needs to meet all of the guidelines of the wholesale lender.
What Does Non-Delegated Mortgage Relationship Mean?
If the mortgage banker has a nondelegated relationship with the wholesale lender, then a mortgage underwriter from the wholesale lender underwrites and approves the loan. If the mortgage banker has a delegated relationship with the wholesale lender, then the mortgage banker will need to underwrite the loan with their in-house mortgage underwriter.
The Role of a Delegated Mortgage Underwriter
The mortgage banker’s in-house mortgage underwriter needs to understand and be familiar with the guidelines of the wholesale lender and underwrite it to their standards. The wholesale lender will not purchase the loan after it funds it if the loan does not meet its guidelines and/or overlays. One of the main benefits of being a delegated mortgage banker is you have more control of the loan process. If you are a mortgage broker or a non-delegated mortgage banker, you are in the hands of the mortgage underwriter of the wholesale lender for turnaround times.
Turn Times on Delegated Versus Nondelegated Mortgage Underwriting
During busy times, underwriting turnaround times can be 7 days or more. However, if you have your own in-house underwriter, it is up to the in-house underwriter how fast they can underwrite a loan. Delegated mortgage bankers have better pricing for mortgage bankers. Therefore, there is more profit for the lender. However, there are more risks for the mortgage banker as well. In the event, that the in-house mortgage underwriter made a mistake, the wholesale lender will not purchase the loan. This means the mortgage banker needs to hold on to the loan and tie up their warehouse line of credit.
What Happens When a Mortgage Loan Defaults?
Bad loans can literally bankrupt a small mortgage banker. Non-delegated loans have less risk on the mortgage banker. This is because the loan is underwritten by the mortgage underwriter of the wholesale lender. In the event, that the loan goes bad, it is the responsibility of the wholesale lender because their underwriter signed off on the loan. Smaller mortgage bankers can get paranoid about a loan going bad after the loan funds. Bad loans where mortgage bankers have to buy them back are called scratch and dent loans.
What Are Scratch and Dent Loans in Mortgage Underwriting
Here is the definition of a scratch and dent loan:
Scratch and dent mortgages are Mortgage Loan secured by a first mortgage lien on a one to four family residential property intended by the originator to conform with FNMA, FHLMC or other conduit standards but which was subsequently discovered did not meet the originally intended market parameters due to errors in relevant documentation or credit deterioration of the obligor and as to which the representations and warranties set forth on Schedule 1 hereof are true and correct.
There are buyers of scratch and dent mortgages. However, mortgage bankers that sell scratch and dent mortgages will take a loss. If a mortgage banker funds a loan to a borrower who met all agency guidelines up to the date of closing but the borrower quit their job right after closing, this loan will fall into a scratch and dent loan. The buyer of the loan will kick it back to the mortgage banker and consider it a bad loan. Talk to an expert Loan Officer about mortgage
Frequently Asked Questions (FAQs)
- What is the difference between delegated and nondelegated mortgage underwriting?
Delegated underwriting allows a lender to approve and fund a mortgage loan without needing the loan file reviewed by the investor upfront. On the other hand, Nondelegated underwriting requires the investor to review and approve the loan file before funding. - How does delegated underwriting work?
In delegated underwriting, the lender can approve and fund the mortgage loan based on their own underwriting guidelines. The lender takes on the risk linked with the loan and has the option to sell it to investors subsequent to funding. - What are the benefits of delegated underwriting?
Delegated underwriting allows for faster loan processing and greater flexibility for the lender. It also has the potential to alleviate the administrative workload connected with submitting loan files for review by investors. - What are the risks of delegated underwriting?
The main risk of delegated underwriting is that the lender bears the responsibility linked to the loan, encompassing the risk of default. If the loan defaults, the lender may incur financial losses. - How does nondelegated underwriting work?
In nondelegated underwriting, the lender submits the loan file to the investor for review and approval before funding. The investor reviews the loan file to ensure it meets their underwriting guidelines before providing funding. - What are the benefits of nondelegated underwriting?
Nondelegated underwriting provides an additional layer of risk management for investors as they review and approve each loan file before funding. This can help reduce the default and ensure compliance with underwriting standards. - What are the risks of nondelegated underwriting?
The main drawback of nondelegated underwriting is that it can result in slower loan processing times, as the loan file must be submitted to the investor for review before funding. Additionally, if the investor rejects the loan file, the lender may need to find an alternative funding source. - Which type of underwriting is more common?
Delegated underwriting is more common in the mortgage industry, as it offers greater speed and flexibility for lenders. However, some lenders still use nondelegated underwriting, particularly for loans that still need to meet the underwriting criteria of delegated investors. - Can a lender offer both delegated and nondelegated underwriting options?
Yes, some lenders offer delegated and nondelegated underwriting options to provide flexibility for borrowers and accommodate a wider range of loan scenarios. - How do lenders determine whether to use delegated or nondelegated underwriting?
Lenders typically consider factors such as loan volume, investor requirements, borrower profile, and loan complexity when deciding whether to use delegated or nondelegated underwriting for a particular loan.
If you have more questions about delegated versus nondelegated mortgage underwriting, you can call us at GCA Mortgage Group by calling 800-900-8569 or text us for a faster response. You can also email us at alex@gustancho.com. Our expert Loan Officers are available even during weekends and holidays!
