Direct Versus Correspondent Lender And Pros And Cons Explained

• We 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
• 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

In this article, we will discuss and cover Direct Versus Correspondent Lender And Pros And Cons Explained.

What Are The Differences Between Mortgage Brokers?

Mortgage Brokers need to be licensed and represent various lenders.

• A mortgage broker may have a relationship with one direct lender or dozens of lenders
• Most direct lenders do not deal with public customers (retail)
• They use mortgage brokers as their sales forces to avoid the costs of running a retail force
• They often do not want the many headaches with regulatory and compliance responsibilities that come with running a retail operations center
• Advantages of working with mortgage brokers are borrowers can have a middle man to act on their behalf in lieu of a commission
• Borrowers can get the best mortgage interest rates with direct lenders
• There are many different lenders a loan officer can present a borrower with a certain type of credit issue
• In general, direct lenders will have lower rates than dealing with mortgage brokers
• Correspondent lenders are partners of direct lenders
• From my experience in working at various mortgage companies, it best to deal with direct and correspondent lenders than brokers 

Mortgage brokers are not lenders:

• Brokers do not have control

They need to depend on direct and correspondent lenders for underwriting and funding decisions.

What Are Direct Versus Correspondent Lender

I had personal experiences working at both correspondent lenders and direct lenders.

• There are pros and cons working for a direct versus correspondent lender
• There are many advantages of dealing with a direct versus correspondent lender
• This is because direct lenders have their own underwriters and have full control

Benefits Of Direct Versus Correspondent Lender

Here are the advantages of working for correspondent lenders versus direct lenders:

• Correspondent Lenders are lenders who have a correspondent relationship with several direct lenders and act as an arm of the direct lenders
• Differences of direct versus correspondent lender are that the direct lender will service the loan once the correspondent lender sells the loan to the direct lender once it funds the loans
• Both Direct and Correspondent Lenders fund mortgage loans under its own company name
• After it funds will sell it to the direct lender
• A mortgage company can be a correspondent lender for Chase or Citibank
• They will need to follow the guidelines of Chase and Citibank
• Once they close their loan, the loan will get sold to Chase and/or Citibank
• The loan will close on the name of the lender originating the loan
• 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
• If they do not, they will not buy the loan after it funds

The benefits of correspondent lending are that a mortgage company can have multiple correspondent relationships with direct lenders.

Overlays By Mortgage Lenders

Direct lenders can have overlays on many items:

• Direct lenders can pick and choose where to submit a file that is best suited to a borrower with a certain issue
• For example, if a borrower has a 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 are that direct lenders will process and underwrite to their own mortgage guidelines
• Since direct lenders have a greater risk than correspondent lenders, they normally have overlays
• Their fees will be substantially higher than dealing with other types of lenders

Mortgage Brokers Need To Disclose Commissions

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 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

This is because mortgage brokers will most often have higher rates than direct and correspondent lenders to commissions.

Negatives Of Direct Versus Correspondent Lender

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