There are two main sources of mortgages for consumers: retail lenders and wholesale lenders. Retail lenders loan their own money and employ loan officers to work directly with customers. The alternative is a wholesale mortgage. Borrowers don’t interact with wholesale lenders directly.
What Is a Wholesale Mortgage Lender?
A wholesale mortgage lender is a financial institution that funds home loans without interacting directly with its customers. Instead of using in-house loan officers, wholesale mortgage lenders accept loan applications from intermediaries such as mortgage brokers and other partners.
“They’re the entity that provides the money for the consumer’s mortgage, but they’re not working directly with the consumer,” says Kathleen Kaylor, an account executive at Luxury Mortgage, a wholesale mortgage lender in Orange County, California.
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How Does Wholesale Mortgage Lending Work?
In wholesale mortgage lending, a wholesale lender decides on its loan offerings and sets its qualification requirements. It shares program and pricing information with its partners on wholesale “rate sheets.”
A mortgage loan broker markets mortgages to prospective borrowers. If a consumer is interested in a home loan, the broker compares mortgage rates and terms from wholesale lenders it works with and helps the consumer choose a suitable option. The broker gathers information and documents from the borrower to complete a loan application package and forwards the application to the lender’s underwriters. If the underwriters have further questions, the broker communicates with the consumer to get the needed information.
Following the lender’s approval, the lender generates closing documents for the borrower to sign. The broker and borrower review the documents. If everything is correct, the borrower signs, the loan closes and the lender funds it. The broker is paid a fee, usually by the lender but sometimes by the borrower. Wholesale lenders often sell mortgages to investors, although they may also hold them in their own portfolios. Wholesale lenders may retain the rights to service their mortgages, or they may sell the servicing rights to another company.
What Are the Differences Between Wholesale and Retail Lending?
The main difference between wholesale and retail lending is that retail lenders offer loans directly to consumers, while wholesale lenders work with brokers.
“Their client really is the broker, so what they’re basically trying to do is give them the quickest way that they can get loans funded,” says Jeffrey Taylor, co-founder and managing director at Mphasis Digital Risk, a Florida mortgage technology company.
Both wholesale and retail lenders can collect origination fees from borrowers, but wholesale lenders may pass the fee to the broker as compensation.
Other differences are that brokers generally have relationships with more than one wholesale lender and may provide a wider range of products, including non-QM and nonprime loans. And wholesale lenders may be able to offer better rates because they do not have the marketing costs of a retail lender.
Wholesale lenders don’t generally have ongoing relationships with their borrowers. In contrast, a consumer might have previously taken out other loans from a retail lender or might have checking or savings accounts at its institution. Thus, a retail lender may have a more complete picture of a borrower’s financial history and be able to offer promotional pricing or added underwriting flexibility.
Compared with wholesale lenders, retail lenders are more likely to service loans themselves.
Can a Company Be Both a Wholesale and a Retail Lender?
Yes, a lender can offer both wholesale and retail loans through separate channels. Wholesale loans can be riskier for lenders than retail loans because wholesale lenders have less information about their borrowers. So a lender that operates in both spheres will typically establish separate pricing, infrastructure and procedures to manage risk in the different channels.
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How to Get a Home Loan From a Wholesale Lender
Applying for a home loan from a wholesale lender is much like applying with a retail lender. Here’s how the process works.
1. Find a broker by searching online or asking people you know for recommendations. Try to speak with a couple of different brokers to make sure you’re getting the best rates. Look up the broker in the National Multistate Licensing System to confirm they are licensed and in good standing. Check whether you or the lender pays the broker, and find out how much the fee is.
2. Ask the broker to show you a few quotes. You’ll need to provide some information, such as your Social Security number, income and the address of the home you want to buy.
3. The broker checks your credit, prequalifies you and compares loans from different wholesale lenders. You review the options that the broker presents.
4. Tell the broker when you’re ready to proceed with a full loan application. You might continue applying for a loan you previously prequalified for, or the broker might show you new loans if anything in your finances has changed. Being preapproved for a mortgage can make shopping for a home easier.
5. Submit the documents the broker asks for. The broker passes your information on to the lender’s underwriters, and you hear back if anything needs to be updated or added. Once you’re preapproved, you can shop for a home or complete a refinance. Your lender should provide you with a preapproval letter.
6. Your broker will order an appraisal and help you meet any final conditions.
7. Close on the loan once you receive the lender’s final approval.
8. Find out who the loan servicer is. “Typically after the loan funds, within the first few weeks, they will get a welcome letter, and that is where the borrower will be notified as to where to send their first payment,” Kaylor says.
Pros and Cons of a Wholesale Mortgage
Wholesale lenders and retail lenders both have their strong points, so which one is best depends on your situation and the type of customer experience you prefer.
Advantages of a Wholesale Mortgage
Wholesale home loans may be easier to shop for.
If you get a quote from a retail lender, you learn only about that particular lender’s products. Comparing quotes requires some additional legwork if you have to contact other lenders and submit your information each time.
In contrast, a broker can show you options from multiple wholesale lenders at once. “They’re not going to be locked into one bank’s offering. That broker can go out and give you rates from six or seven different lenders,” Taylor says.
Wholesale lenders may offer less-common types of mortgages like bank statement loans and other non-QM loans.
“As a mortgage broker, there’s a lot larger menu to offer the borrowers than typically in some retail shops,” Kaylor says.
Wholesale lenders may offer more competitive rates and terms than a retail institution, and they might be able to help borrowers who have been turned down by retail lenders. That’s because they have access to multiple institutions and may be able to find a niche program not offered by a mainstream retail bank.
“One of my first loans was a manually underwritten loan with a 581 FICO score, and this loan would have not been taken by a local bank,” says Martin De La Garza, loan originator and broker/owner at Motto Mortgage Best Life. “We were able to do a manually underwritten loan, still get them qualified, used 401(k) reserves. We were able to pull out every trick in the book to get them to the closing table.”
[READ: Compare Current Mortgage Rates]
Disadvantages of a Wholesale Mortgage
Wholesale lenders are a step removed from borrowers, so if you value the ability to speak directly with a lender, a retail loan is likely the better choice.
If you have a history of banking with a retail lender, you might be eligible for a better rate than a wholesale lender. If the lender values your ongoing business relationship, it may offer a better deal to keep you. On the other hand, wholesale lending is transactional and the lender knows nothing about you except for what’s included in your application packet.
Taylor notes that having credit cards, auto loans, savings accounts, checking accounts or lines of credit with the same institution can make it easier to get approved for a mortgage. And when you take out a mortgage with a local retail bank, you might be able to stop by a branch to make a payment or ask a question about your loan. That typically isn’t possible with a wholesale mortgage.
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What Is a Wholesale Mortgage Lender? originally appeared on usnews.com
