Most adults understand the basics of how mortgages work but are often confused by some of the technical language commonly used by lenders and financial news sites. Two good examples of this are found in the terms "wholesale lending" and "wholesale mortgages." If you are entering the mortgage market due to a need to refinance a current home loan or take out a new one for an upcoming real estate purchase, this information will help you understand how wholesale lending and mortgages work.
What is meant by wholesale lending in reference to home loans?
Many Americans use mortgage brokerage services when they need to take out a home loan or refinance an existing one. Similar to an insurance broker, a mortgage broker works with many lenders to get the best interest rates and terms for their mortgage clients. These lenders are typically wholesale lenders, which means that each lender does their own funding and retains underwriting authority and can earn fees to help cover associated costs, such as funding, underwriting, and administration fees.
The mortgage broker typically has a prenegotiated agreement with each wholesale lender they work with, which allows them to handle the loan origination process in return for a fee. Applicants who apply for a home mortgage loan through a mortgage broker will work solely with the mortgage broker throughout the process, even if the loan is coming from a wholesale lender.
Are banks and direct mortgage lenders partnering with wholesale lenders?
Home loan applicants who apply for a mortgage at their local bank, at their credit union, or through a direct mortgage lender will not be working with wholesale lenders. Instead, applicants will be limited to only the home loan types and programs that the bank or direct mortgage lender has chosen to offer, including mortgages that will continue to be held in-house by the bank and not put up for sale on the secondary loan market.
Which type of lending is best for consumer mortgages?
In most cases, a mortgage broker working with one or more wholesale lenders will be able to offer more competitive loan rates, as well as more favorable terms than banks that have more rigid lending guidelines. However, there are instances in which a mortgage applicant may prefer working with their local lender, especially if they already enjoy a good working relationship.
Consumers who want to learn more about wholesale lending or have other questions about mortgage lending should consider making an appointment to meet with both their current lending institution and a reputable mortgage broker before making any mortgage-related decisions.