What Is a Wholesale Mortgage Lender?

Many homeowners buy their homes through mortgage brokers. These are retail-facing third parties who help pair potential borrowers with potential lenders in the mortgage market. Brokers don’t provide the financing for a mortgage themselves. Instead, they facilitate loans provided by what is known as wholesale mortgage lenders. Here’s how it works. A financial advisor can provide valuable insight and guidance as you work a mortgage into your financial plan.

Generally speaking, a mortgage lender is the institution that provides or helps you to find a home loan. However, wholesale mortgage lenders are mortgage lenders who do not work directly with consumers. Instead, they provide their loans through third-party mortgage brokers.

In this way, wholesale lenders operate like any other wholesale operation. For example, a wholesale soft drink distributor doesn’t sell cans of Pepsi to individual consumers. It sells cans of Pepsi to grocery store owners, who in turn sell that product to the consumer. A wholesale mortgage lender operates the same way.

In most cases a wholesale mortgage lender works through dedicated brokers. Those brokers will have a series of lenders that they work with. When a borrower works with a mortgage broker, the broker will present loans offered by the wholesale lenders it works with. The borrower can then pick from those options. This is not a hard and fast rule. A wholesale lender can work through banks, direct lenders and any other third-party institution, but most wholesale loans are issued through lenders.

A wholesale lender rarely, if ever, directly interacts with the borrower. Instead the mortgage broker (or other third party) services the loan, meaning that the broker collects payments, manages customer service with the borrower and handles any issues that arise. The broker receives a fee for this service from the wholesale lender. This allows the wholesale lender to focus only on the financial side of its business. It doesn’t need to operate customer service, credit checks, advertising or any other potentially costly consumer-facing operations.

Understanding Other Types of Mortgage Lenders

Retail Lender

A retail lender provides home loans as part of a variety of financial services it offers to consumers. Most retail lenders are depository institutions such as banks or credit unions. They typically use their own money to make loans, often drawing this money from assets they have on deposit. What distinguishes a retail lender is that they are not a specialty institution. They might have some specialization, but they are consumer facing and offer financial products in addition to home mortgages.

Direct Lender

A direct lender specializes in writing home loans. While the institution may offer some ancillary services, a direct lender focuses on writing mortgages as its core business. Unlike most retail lenders, a direct lender may either use its own money for the loan or it may borrow the money from elsewhere. Unlike a mortgage broker, a direct lender only offers its own services. It does not connect borrowers with third-party loans. A direct lender issues its own loans on its own terms, even if it borrows the money to do so.

How Mortgage Brokers Differ From Mortgage Lenders

A mortgage broker connects borrowers with mortgage lenders. Unlike either retail or direct lenders, a mortgage broker does not extend loans itself. Instead, these are service providers who facilitate transactions. Unlike a retail or direct lender, a mortgage broker can present the borrower with a range of potential loan options. This is because the broker presents a series of potential lenders, while direct and retail lenders only present their own products. When borrowers choose their loan the broker facilitates this transaction, but the money comes from a third party.

There are several other types of lenders, such as portfolio lenders and hard-money lenders. However, those are generally focused on business-to-business lending. Relatively few individual homeowners will work with one of these institutions.

Retail and direct lenders handle the financing for a home loan themselves. This can mean that they lend from their own capital on hand, it can mean that they borrow the money from a third party, or it can mean some other form of financing. In all cases, however, the mortgage holder borrows the money directly from the institution.

Mortgage brokers do not do this. They are retail establishments that connect borrowers with lenders. They do not provide the loan themselves. In many, if not most, cases a broker provides loans issued by wholesale lenders.

How Wholesale Mortgage Brokers Raise Money to Lend

In most cases, a wholesale mortgage lender finances its loans by selling them on the secondary market in the form of assets known as mortgage-backed securities. The wholesale lender will take a number of mortgages (typically thousands of them) and put them in one portfolio. It then sells this portfolio as a single asset to financial firms, which in turn sell shares in this portfolio. Investors who buy shares in a mortgage-backed security collect returns based on the average interest rate of the underlying mortgages and the payments made by those homeowners.

Wholesale lenders who sell mortgages on the secondary market do so in order to raise liquidity. They use the money they make selling previous mortgages to extend future mortgages. In some cases they also use this money to offer better interest rates than their competitors.

Bottom Line

A wholesale mortgage lender is a lender who extends home loans to retail customers through third parties. Generally, these third parties are mortgage brokers. That means wholesale mortgage lenders do not work directly with borrowers. Instead, they usually raise capital by securitization. This is essentially the selling of mortgages on the secondary market.

Tips on Mortgages

Consider working with a financial advisor as you decide how to pay for a new residence. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.