A warehouse line of credit is a revolving credit facility primarily used by mortgage lenders to fund loans temporarily before selling them in the secondary market. This credit line bridges the gap between loan funding and loan sale, ensuring a steady flow of capital for originating new mortgages without requiring lenders to use all their own funds upfront.
How Warehouse Lines of Credit Work
Mortgage lenders draw funds from their warehouse line to disburse loan proceeds to homebuyers at closing. The loans they fund serve as collateral for the amount drawn. Once these loans are pooled and sold to permanent investors like Fannie Mae, Freddie Mac, or private institutions, proceeds from the sale repay the warehouse line, replenishing the lender’s available credit.
This revolving mechanism allows lenders to continuously originate and fund mortgage loans, maintaining liquidity in the housing finance system. Without warehouse lines, lenders would face significant delays or capital constraints, which could slow down mortgage approvals and impact homebuyers.
Users and Impact
Mortgage bankers and correspondent lenders primarily use warehouse lines. While homebuyers are not directly aware of these credit lines, warehouse financing is critical to keeping mortgage funding accessible and timely.
For more on mortgage lending roles, see our Mortgage Banker overview.
Key Features
| Feature | Description |
|---|---|
| Purpose | Short-term financing to fund loans before sale |
| Users | Mortgage bankers and correspondent lenders |
| Collateral | The mortgage loans funded |
| Term | Usually 30-60 days or until loans sell |
| Interest Rates | Variable, often linked to SOFR or Prime Rate plus a margin |
| Credit Limits | Based on lender’s financial health and volume |
Risks and Considerations
Warehouse lines expose lenders to interest rate risk and the risk that loans may not sell promptly, requiring the lender to cover repayments using their own capital. Lenders and their warehouse providers must manage these risks carefully to maintain financial stability.
Regulatory Environment
Warehouse lines of credit are provided by regulated financial institutions and are subject to banking rules. Mortgage lenders who use them are overseen by federal and state agencies such as the Consumer Financial Protection Bureau (CFPB).
For authoritative information, see the Consumer Financial Protection Bureau.
Sources:
- Investopedia, “Warehouse Line”
- Mortgage Bankers Association, “Understanding Mortgage Warehousing”
This explanation is designed to clarify warehouse lines of credit as a foundational tool in mortgage finance, essential to keeping mortgage lending efficient and accessible.