Correspondent lending is a common practice in the mortgage industry where a lender, known as the correspondent lender, originates, underwrites, and funds a loan with its own capital. Shortly after the loan closes, the correspondent lender sells it to a larger financial institution or investor, such as a major bank or government-sponsored enterprise like Fannie Mae. This process helps the original lender replenish its funds to originate new loans while enabling the investor to grow its loan portfolio without engaging in direct customer origination.
Think of correspondent lending like a local bakery that bakes cakes (originates loans) and then sells them wholesale to a big supermarket chain (the investor) that distributes them to customers. You, the borrower, apply and close your loan with the local lender but eventually make payments to the larger institution.
How Correspondent Lending Works:
- Loan Application: You apply for a mortgage through a correspondent lender, often a local bank, credit union, or mortgage company.
- Underwriting and Funding: The correspondent lender verifies your financial details, appraises the property, and funds the loan from its own resources.
- Loan Sale: Within days or weeks after closing, the lender sells your loan to a larger investor.
- Notification: You receive a loan transfer notice explaining the change and your new payment details.
Correspondent Lending vs. Mortgage Broker
While both help borrowers access loans, correspondent lenders and mortgage brokers serve different roles. Correspondent lenders underwrite and fund loans themselves before selling them, acting as the original lender. Mortgage brokers act as intermediaries who connect borrowers with lenders but do not fund loans.
| Feature | Correspondent Lender | Mortgage Broker |
|---|---|---|
| Funds Loan | Yes, uses own capital | No, does not fund loans |
| Role | Originates, underwrites, and closes loans | Matches borrowers with lenders |
| Borrower Interaction | You work directly with the lender at closing | You apply through the broker but loan is funded by another lender |
Why Does Correspondent Lending Exist?
This model benefits all parties:
- Correspondent lenders free up capital quickly to make more loans.
- Large investors efficiently acquire loans without local origination costs.
- Borrowers, like you, often enjoy competitive rates and more lending options.
What Happens When Your Loan Is Sold?
According to the Consumer Financial Protection Bureau (CFPB), when your loan is sold to a new servicer:
- Your loan terms—such as interest rate and repayment schedule—do not change.
- You must receive a notice informing you of the transfer and where to send payments.
- There is a 60-day grace period when payments sent to the former servicer won’t incur late fees.
The primary change you’ll notice is the name on your monthly statement and the payment website. For more details on mortgage servicing transfers, see our article on Mortgage Servicer Transfer.
Additional Resources
Explore related topics such as Mortgage Broker to understand how brokers differ from lenders.
Sources
- Consumer Financial Protection Bureau. “What happens if my mortgage is sold to a new servicer or the servicer changes?” consumerfinance.gov
- Investopedia. “Correspondent Lender: Definition, How It Works, Vs. Broker.” investopedia.com
- Forbes. “Mortgage Correspondent Vs. Broker: What’s The Difference?” forbes.com