What is correspondent lending?

When you buy a home, applying for a mortgage is a uniform affair – it differs little whether you apply through a correspondent lender, mortgage broker, or your local bank. You’ll fill out roughly the same forms, submit the same documents, and go through the same credit checks.

However, after you close on your loan, what happens to your mortgage can change depending on what type of lender you have. In many cases, especially when you borrow from a correspondent lender, your new mortgage will be sold on the secondary mortgage market.

But don’t worry. This typically changes very little for you; in fact, often you won’t even know.

What is correspondent lending and how does it work?

Correspondent lending happens when a lender originates and funds a mortgage, but then sells the completed loan to another financial institution or investor after closing. This is very common and actually serves an important function in keeping the mortgage market healthy.

The buyer may be Fannie Mae or Freddie Mac, or private investors who buy mortgage-backed securities (MBS), which are pools of many mortgages. These are often guaranteed by another government agency, Ginnie Mae, and may include Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans.^{1, 2} This complex arrangement ensures that the real estate markets are stable, affordable, and liquid. Freeing up lender capital in this way makes it possible for more people to get mortgages.

But don’t worry. If you’re the borrower of one of these loans, typically, nothing changes about your loan after it’s sold other than the owner and, in some cases, the servicer. So, your terms, interest rate, and monthly payment remain the same.

Now let’s look at each step individually.

Origination

Origination begins when you first apply for a mortgage. Your correspondent lender will collect a lot of information, including your financials, credit history, the property information, and more. Depending on how your lender works, they may also underwrite and approve your loan.

Funding

On closing day, your correspondent lender funds your loan in their name. The money could come from them directly, or from a warehouse line of credit, but that will make no difference to your mortgage. Your loan could also undergo something called a table-funded transaction. Here, another party provides the funds for the loan, and the loan is transferred to them immediately or within hours.

Sale on the secondary market

After closing, the correspondent lender will typically sell your loan to an investor or institution on the secondary mortgage market. The buyer could be Fannie Mae, Freddie Mac, or private investors. This allows your correspondent lender to free up capital to offer more mortgages.

What changes for the borrower after the loan is sold?

Typically, very little will change with the sale of your mortgage. It doesn’t change the interest rate, remaining principal balance, or repayment terms you agreed to in your loan documents. They remain a valid contract.

Ownership of your mortgage and the servicing of it are two different things, however. So, the correspondent lender could remain as the servicer of the loan, or servicing may transfer to another company. If the servicer does change, you’ll get a notice about where to send your future monthly payments. But again, the important things, like your interest rate and monthly payment, will remain the same.

Example of correspondent mortgage lending

Let’s say an eligible veteran who holds a Certificate of Eligibility works with Rocket Mortgage to buy their home. We take their application, collect all necessary documentation, schedule an appraisal, and handle all the underwriting that needs to be done for them to qualify. When the loan closes, we provide the funding.

Within a few months after the loan closes, we sell the loan on the secondary market. Often, the mortgage is included in a mortgage-backed security to sell to investors on the bond market. We take the money we got from the sale and use it to make more loans to aspiring home buyers or people looking to refinance to accomplish a goal.³

Because Rocket Mortgage is also a servicer, our relationship with the borrower doesn’t end when the loan is sold, and the loan terms stay the same. We forward principal and interest payments to the MBS investors and maintain our client’s escrow account if they have one.

Types of correspondent lenders

Not all correspondent lending works the same way. Here are the three common correspondent lender types and how they operate.

Delegated correspondent lender

A delegated correspondent lender is given the authority by an investor to use their guidelines and approve and underwrite mortgages. Here, the correspondent lender handles the origination, underwriting, and funding, then delivers the completed mortgage to the investor. This can make the process more streamlined because decisions are all under “one roof.”

Non-delegated correspondent lender

A non-delegated correspondent lender also originates and funds mortgages, but here the investor makes the final underwriting decision. The non-delegated correspondent collects all the documentation and prepares the mortgage for approval. Then, the investor reviews it. If they approve, the nondelegated correspondent funds the loan.

Mini-correspondent lender

As the name implies, a mini-correspondent is a smaller lender operating with fewer resources, a limited warehouse line of credit, or relationships with a relatively small number of investors. They leverage their ability to fund loans by using warehouse lines of credit. Once they sell the loans, it replenishes their credit line, and they can originate and fund more loans.

Correspondent lender vs. mortgage broker: What’s the difference?

When you search for a mortgage, you have choices. One of them is whether to work with a mortgage broker. Here’s a quick breakdown of the difference between a mortgage broker and a correspondent lender.

Correspondent lender

A correspondent lender handles all the functions associated with mortgage origination. They can take your application, underwrite your loan to make sure you qualify, and fund the loan. After loan closing, the correspondent lender sells the loan to an investor or institution.

Mortgage broker

A mortgage broker acts as the intermediary between the borrower and mortgage lenders. They will take your application and collect all the documentation needed for underwriting. However, they will then shop your application to various lenders to try to get you the best deal given your qualifications. Once you have decided on a lender, the lender underwrites and funds your loan.

Correspondent lenders like Rocket Mortgage often work hand in hand with mortgage broker partners. These mortgage brokers provide a face-to-face connection in the community, and clients can meet with them to understand their goals. At the same time, Rocket Mortgage provides underwriting and funding services that a local partner may not have the capital or staff for.

Correspondent lender vs. mortgage broker: What’s the difference?

When you search for a mortgage, you have choices. One of them is whether to work with a mortgage broker. Here’s a quick breakdown of the difference between a mortgage broker and a correspondent lender.

Correspondent lender

A correspondent lender handles all the functions associated with mortgage origination. They can take your application, underwrite your loan to make sure you qualify, and fund the loan. After loan closing, the correspondent lender sells the loan to an investor or institution.

Mortgage broker

A mortgage broker acts as the intermediary between the borrower and mortgage lenders. They will take your application and collect all the documentation needed for underwriting. However, they will then shop your application to various lenders to try to get you the best deal given your qualifications. Once you have decided on a lender, the lender underwrites and funds your loan.

Correspondent lenders like Rocket Mortgage often work hand in hand with mortgage broker partners. These mortgage brokers provide a face-to-face connection in the community, and clients can meet with them to understand their goals. At the same time, Rocket Mortgage provides underwriting and funding services that a local partner may not have the capital or staff for.

Correspondent lending vs. other mortgage lending options

Although there are various lending models, from the borrower's perspective, they look nearly identical. The difference is mostly behind the scenes and what happens to your mortgage after it closes and is sold. Let’s look at some comparisons.

Correspondent lending vs. wholesale lending

The distinction between wholesale vs. correspondent lending is the role of the company dealing with the borrower. With correspondent lending, the correspondent originates and funds the loan itself, usually using its own capital or a wholesale line of credit. Then, they sell the mortgage.

In wholesale lending, a mortgage broker is usually involved. The broker works with the borrower, shops wholesale lenders, and chooses the one that best fits their client’s needs. Then, following closing, the wholesale lender sells the mortgage on the secondary market.

Correspondent lender vs. portfolio lender

The difference between a correspondent vs. portfolio lender comes down to what happens after closing. Generally, a correspondent lender plans to sell the mortgage on the secondary market. A portfolio lender, on the other hand, keeps the mortgage in their own portfolio after originating and funding it. This means they may have more flexibility in creating their lending criteria.

Correspondent lending vs. retail lending

This distinction is a bit more complex. For instance, a retail lender works directly with borrowers through its own loan officers, website, branches, or call centers. Examples include commercial banks, credit unions, and online mortgage lenders.

A correspondent lender is defined by the model they choose. They originate and fund the mortgage and usually sell it to investors after the loan closes.

The pros and cons of using a correspondent lender

There are numerous benefits to working with a correspondent lender, but there are pain points to be aware of as well.

Pros

• Wider variety of products. Since correspondent lenders work with a variety of mortgage investors, they may have a wider variety of products available than a portfolio lender like a credit union or other bank.
• Knowledgeable on approval guidelines. Because of the established relationships with so many mortgage investors, a correspondent lender is likely to have a good idea of the different conditions that need to be met for approval, as well as exceptions to any guidelines that may be dependent on personal circumstances.
• Direct funding. Unlike a mortgage broker, the correspondent lender actually funds the mortgage. This takes out another layer of potential confusion and delay.
• Experienced with mortgages. When you go with a correspondent lender, you’re getting vast connections and experience. With a wide portfolio of options, a correspondent lender can likely find you a desirable mortgage that meets your specific situation.

Cons

• Possible extra fees. Some lenders charge extra fees. Make sure you're aware of how much you're paying and that everything is broken down and explained.
• Policies must be followed. Because correspondent lenders are selling to major mortgage investors, those investors have policies that need to be adhered to. Those might not fit your situation.
• Servicing could change. Servicing can be transferred separately from ownership of the mortgage. However, your terms, rate, and monthly payment typically won’t change.
• Need for due diligence. Read the reviews when you’re looking for a reputable lender. This can help you have confidence in your choice.

Questions to ask before choosing a correspondent lender

Ask these questions before choosing a lender:

• Which loan programs are available for this type of property?
• Who will underwrite and fund my mortgage?
• What lender fees and closing costs will I pay?
• Is the lender likely to sell the mortgage after closing?
• Does the lender expect to retain servicing?
• If servicing changes, how will I be notified?
• How long does the lender typically take to close?
• Who will be my primary contact during the mortgage application and approval process?

FAQ

Here are answers to common questions about correspondent lending.

How does a correspondent lender make money?

This depends on the lender’s business model. A correspondent lender can earn money from fees associated with originating the mortgage. It can also earn money from fees for selling the completed loan to an investor. If the correspondent lender becomes the servicer, they can earn fees for that. So, the way and the amounts vary.

Which are the top correspondent lenders in the US?

There isn’t one definitive ranking for correspondent lenders. Also, major mortgage companies (like Rocket Mortgage), banks, and other financial institutions may operate correspondent lending entities along with retail, wholesale, or servicing businesses. So it’s tough to compare apples to apples in the industry.

How much does a mortgage broker make on a $500,000 loan?

There is no single, industry standard amount for a broker on a $500,000 mortgage. That said, mortgage brokers typically earn a 1% – 2% commission on loans they generate. So, this would translate to $5,000 – $10,000 on a $500,000 loan.

What kind of properties can be purchased through correspondent lenders?

This depends on the loan programs that are offered by the particular correspondent lender. But typically, correspondent lenders offer mortgages for a wide variety of property types, from single-family homes and condominiums to eligible multifamily properties, second homes, and investment properties.

How can you identify a reputable correspondent lender?

A good place to start is asking your real estate agent. They have probably worked with many borrowers and lenders and might be able to recommend a good fit for you. Then, do your due diligence. Search for reviews by past clients. Make sure they are in the NMLS Consumer Access database and are completely transparent with you, answering any questions fully and putting important information in writing.

The bottom line: Correspondent lenders make mortgage shopping easier

There are many benefits, as well as a few potential drawbacks, to correspondent lenders. They give you a wide variety of loan choices and make it possible for more people to get mortgages and own homes.

Most of the time, the fact that your correspondent lender sells your loan after it funds will remain unnoticeable. Your loan terms will remain the same, and you’ll make your payments as usual. A win for all involved.

When you’re ready to buy a home, Rocket Mortgage can help you get the best loan for your needs. Apply today.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

³ Refinancing may increase finance charges over the life of the loan.

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, investment, or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

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