In my personal experience as a mortgage originator I have had the opportunity to work for both direct and correspondent lenders, and I’ve seen the pros and cons of each type of loan. Here are my thoughts about which loan dominates in which areas:
A correspondent lender is a lender that funds loans in its own name but sells the loan to a direct lender, which then services the loan. Correspondent lenders act as extensions for larger lenders and can also sell loans on the secondary market. In other words, a small correspondent mortgage lender may resell, for example, Wells Fargo products or Bank of America products under their own name.
The issue with correspondent lending is that if the loan is not perfect and problems arise, the loan is sent back to the correspondent lender to be fixed. Also, the loan must be underwritten to the standards of the lender that’s servicing the loan, and if this is not done properly, it causes issues with the loan. Those issues can involve requiring the borrower to remedy a transaction that he or she thought was over with.
This is not an experience that anyone wants to deal with after investing their time (and, more importantly, their money) into their home. Furthermore, a correspondent lender can also charge extra fees associated with the transaction.
A direct lender has no middleman, no extra fees, no extra underwriting guidelines, and a direct lender will also service the loan. This makes the process much smoother and eliminates a lot of moving parts.
Direct lenders might not always have the array of mortgage products that a correspondent lender has, but a direct lender also doesn’t deal with a secondary market, and the borrower doesn’t have to worry about the loan being sold to another lender.
There are many direct lenders of all different sizes, but the ones that are the most successful streamline the process and often keep much or all of the process in-house, meaning that the loans are processed, underwritten and closed in an orderly fashion, and they keep service as a top priority.
Many Realtors have business relationships with lenders they are comfortable working with, but it is important to know the differences between these two types of mortgage lenders and the pros and cons of each respective type. Many Realtors refer a choice of three different mortgage lenders that they like to work with, and I would recommend that a direct lender always be included in this referral process.
Jason Turner is a mortgage consultant who blogs at mypreferredlender.net.