How a Wholesale Loan

When borrowers need a mortgage loan, their source of funding is generally through either a wholesale loan or a retail loan. While they are similar in some respects, they differ in others. For the consumer shopping for a home loan, it's important to know the difference.

What is the Difference?

Retail loan lenders are lenders who perform all of a loan's origination themselves. Wholesale lenders are those lenders who have mortgage brokers perform some loan functions for them. Many large banks and lending institutions have both a retail and a wholesale loan division.

In a wholesale loan, the loan lender offers loans to mortgage brokers at lower costs than their retail branches make available to the general public. The broker, in turn, adds his fees to this wholesale rate. The end result is that the home borrower obtains a loan that is nearly the same (or approximate) cost as that which he or she could have gotten directly from the wholesale lender's retail branch.

Loan Lender vs Mortgage Broker

The loan lender(retail and wholesale loan) provides money to borrowers at closing. The lender gets a note that stipulates details on the debt and repayment obligations, and gets a lien on the borrower's property.

Mortgage brokers are independent contractors that do not themselves lend. Instead, they offer the wholesale lender's loan products. Typically, mortgage brokers have relationships with multiple wholesale loan lenders.

Mortgage brokers have the ability to shop multiple wholesale lenders and therefore potentially offer the borrower the best terms and rates for loans on any given day. Mortgage brokers can also specialize in niche areas that many lenders choose to avoid. These include laons to persons with poor credit ratings.

Functions Performed by Lenders

Retail loan lenders perform six key functions with respect to loans:

  1.  find customers
  2.  take loan applications
  3.  lock in loan terms
  4.  underwrite loans
  5.  process loans
  6.  close and fund loans
Wholesale loan lenders lock in loan terms, underwrite loans and close and fund loans.

Functions Performed by Brokers

Mortgage brokers perform three functions that the wholesale loan lender does not, including finding customers, taking the loan applications and processing the loans. Once the file is complete, the mortgage broker hands it off to the wholesale lender to complete the loan.

Wholesale Loan: How Does It Work?

Wholesale loans include a markup of interest rates to include commission. The loan originator (mortgage broker) marks up the interest rate with a Yield Special Premium. The wholesale lender gives the mortgage broker a bonus when the broker charges the borrower higher than market interest rates. This bonus is 1 percent of the loan amount for every .25 percent that the borrower agrees to pay above market interest rate. The bonus the mortgage broker or loan originator receives is on top of the origination fees that the borrower will also pay the mortgage broker for their loan origination services.

Wholesale or Retail: Which Is Better?

If you have an existing relationship with a retail mortgage lender, it's always wise to investigate their current loan products and rates in addition to checking out competitive banks. Using a mortgage broker can help you save the time and effort of doing research on your own, and may help you achieve a better loan rate and terms. In the end, it's up to you as the customer to make the best decision given your own circumstances.

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