Buying a home is probably the biggest investment you will make early in your married life. Understanding how the industry works is key to getting the best deal possible for your home loan. It's no wonder that you are confused about who to go to for your mortgage since it seems almost everyone can give you one. The major difference between a correspondent lender and a mortgage bank is where your loan ends up and how that affects the interest rate and fees you pay.
Buying Your Home
When you find the home you want to buy you have to find a lender. You can go to a mortgage broker, who will try to find you the best deal with the companies he works with, but a mortgage broker is just that -- a broker. He doesn't lend you money; he just finds someone who will. Mortgage banks and correspondent lenders actually lend you the money. The difference is that the mortgage bank lends you the bank's capital and usually assumes the risk, while the correspondent lender lends you his own money and sells the risk.
A mortgage bank almost exclusively originates loans for residential real estate and uses the bank's capital to fund it. It then collects interest and payments on the loan. Traditionally, mortgage banks keep the loan throughout its life. Sometimes they sell the loans on the secondary market to reduce their risk in the mortgage market. If your bank sells the loan to another bank to service it, you then make your mortgage payment to the entity that bought it.
A correspondent lender uses his own money to fund your loan. He does all of the things a mortgage bank does -- takes applications, assesses credit risk, verifies asset and employment information -- then closes the loan. However, a correspondent lender never keeps the mortgage. The loan is sold to the larger banks to service and assume the financial risk.
Which to Choose
For you, the major difference between using a mortgage bank or a correspondent lender is the interest rate and fees that you will pay. Correspondent lenders, since they assume no risk, can frequently offer better rates than mortgage bankers. By handling the application and underwriting process themselves, they reduce the processing time for your loan. They shop various lenders to get you the best rate, then they lock in a wholesale price for you, plus their markup. They get their capital returned when they sell your loan. Since mortgage banks are more likely to retain the risk and offer only their own mortgage products at retail rates, they may have higher fees or interest rates to protect themselves and meet their reserve requirements.
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