What Is The Difference Between Direct Versus Correspondent Lender

Direct Versus Correspondent Lender

On this ARTICLE on what is the difference between direct versus correspondent lender, I will discuss the pros and cons in choosing a direct versus correspondent lender when applying for a home loan. There are several different types of lenders and depending on each borrower’s credit and income profile, going to a specific lender may be a better option than going to another. Here are the types of lenders borrowers can go to:
  • Mortgage Brokers
  • Correspondent Lenders
  • Direct Lenders

What Is The Differences Between Mortgage Brokers?

Mortgage Brokers need to be licensed and represent various wholesale lenders. A mortgage broker may have a relationship with one wholesale lender or dozens of wholesale lenders. Most wholesale lenders do not deal with public customers (retail) and use mortgage brokers as their sales forces to avoid costs of running a retail force and/or not wanting the many headaches with regulatory and compliance responsibilities that come with running a retail operations center. Advantages of working with mortgage brokers is that borrower can get the best mortgage interest rates than dealing with direct lenders and there are many different wholesale lenders a loan officer can present a borrower with a certain type of credit issue. In general, direct lenders will have the highest mortgage interest rates and mortgage brokers and correspondent lenders will have the lowest rates. From my experience in working at various mortgage companies, it was next to impossible to do a refinance mortgage working for a direct lender.

What Are Correspondent Lenders

I had personal experiences working at both correspondent lenders and direct lenders. There are pros and cons working for a direct versus correspondent lender. In my opinion, there is a definite disadvantage of working for a direct versus correspondent lender because loan officers are limited on the number of lenders they can submit a mortgage application. Here are the advantages of working for correspondent lenders versus direct lenders:

  • Correspondent Lenders are lenders who has a correspondent relationship with several direct lenders and act as an arm of the direct lenders. 
  • Differences of direct versus correspondent lender is that the direct lender will service the loan once the correspondent lender sells the loan to the direct lender once it funds the loans.
  • Correspondent Lenders funds mortgage loans under its own company name and after it funds will sell it to the direct lender.
  • A mortgage company can be a correspondent lender for Chase or Citibank where they will need to follow the guidelines of Chase and Citibank and once they close their loan, the loan will get sold to Chase and/or Citibank. However, the loan will close on the name of the correspondent lender.
  • If the loan sold to Citibank or Chase does not meet their mortgage guidelines and/or overlays, then Citibank and/or Chase will kick the loan back to the correspondent lender for them to correct it and if they do not, they will not buy the loan back.
  • The benefits of correspondent lending is that a mortgage company can have multiple correspondent relationships with direct lenders.
  • Direct lenders can have overlays on many items so a correspondent lender and pick and choose where to submit a file that is best suited to a borrower with certain issue. For example, if a borrower has higher debt to income ratios, the correspondent lender can sell the loan to a direct lender with no overlays on debt to income ratios. If a borrower has credit scores of 580 FICO, the correspondent lender can sell the loan to a direct lender with no overlays on credit scores.

What Are Direct Lenders

Direct Lenders are mortgage companies that will normally not use any other lenders and will set their own lending guidelines and re-sell them to Fannie Mae, Freddie Mac, Ginnie Mae once they fund the loan. Advantages of dealing with direct versus correspondent lender is that direct lenders will process and underwrite to their own mortgage guidelines. Since direct lenders have greater risk than correspondent lenders, they normally have overlays and their fees will be substantially higher than dealing with other types of lenders. Direct lenders do not have to disclose their fees. For example, the maximum a mortgage broker can make is 2.75% on a commission which is called a yield spread premium. Mortgage brokers can get a 5.75% yield spread premium on a borrower for a higher mortgage interest rate however, the maximum mortgage brokers can get as a compensation is 2.75% and the difference between 5.75% and 2.75% or 3.0% needs to go to the borrower as a lender credit. With direct lenders, they can just keep the extra 3.0% as part of their compensation without disclosing it. Be careful when shopping for rates because direct lenders will most often have higher rates than mortgage brokers and correspondent lenders.

Another disadvantage of dealing with direct versus correspondent lender is that direct lenders will only have one type of loan program where mortgage brokers and correspondent lenders have multiple variety of wholesale lenders where if you do not qualify with one particular wholesale lender, they can shop you to other wholesale lenders.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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