Bank Warehouse Line Alternatives for Private Mortgage Lenders

For many private and hard money lenders, the ultimate capital source for funding loans is a bank warehouse line of credit, but they are difficult to qualify for, and not many banks offer them for lending nationally. In this article, we’ll tell you about two alternatives to warehouse lines that lenders should consider and how to find companies that provide capital for private lending.

This topic is mainly applicable to loan originators, including private lending firms and mortgage brokers who want to become a lender. If you’re a real estate investor, you probably won’t find this information to be useful, unless you’re planning to start a private lending company.

For loan originators who operate with a business model of funding loans and selling to the secondary market, bank warehouse lines are typically the ultimate capital source because they are the cheapest cost of capital available. If you’re charging borrowers an average of 9% interest for your short-term loans, and your warehouse line interest rate is 4%, that’s a huge profit to be made.

The challenge for most lenders is being able to qualify for these warehouse lines. You typically need to pledge an existing portfolio of loans worth several million dollars in order to get the line. Another downside to warehouse lines is the risk of the line being pulled if there is a major economic event. While the likelihood of this happening is very slim, if it does happen, it could kill your entire lending business.

Many local community banks offer warehouse lines, but they typically restrict the geographical areas where you can lend. For example, a community bank in Texas typically won’t accept notes in which the collateral is located outside of Texas. Or a bank based in New York may not accept collateral outside of the Northeast. So you can’t use community bank warehouse lines to lend nationally, and the line amount you’d get from smaller local banks may not be enough to support your growth.

If you are unable to get a bank warehouse line to capitalize your private lending business, there are 2 alternatives you might consider.

Explore Other Capital Structures

If you’ve given up on the idea of getting a warehouse line, but you want to be a portfolio lender, the primary alternative capital structure most lenders use is a mortgage fund. Although it takes years to build up, a portfolio mortgage fund offers more control and stability. But the two alternatives we want to cover are not for portfolio lending. They serve the business model of funding loans and selling to the secondary market.

Alternative #1 – Pre-Takeout Warehouse Line

The first alternative is what we call a “Pre-Takeout Warehouse Line”. This is a very unique product offered by only a few companies in our industry. These capital providers have relationships with multiple institutional loan buyers, also known as aggregators.

So long as the loan you’re originating will be sold to one of those approved institutional loan buyers, the capital provider will allocate a certain amount of money to you based on your average loan volume. At closing, they will fund 80 to 90 percent of the loan amount, and you contribute the difference. The cost for this short-term capital will likely be in the range of 50 to 100 basis points, and the key to this program is the loan must be sold to the institutional loan buyer within 15 days.

Alternative #2 – Liquid Mortgage Fund

The second alternative to bank warehouse lines is a “Liquid Mortgage Fund.” So you’d form a mortgage fund just for the purpose of funding loans that will be sold to the secondary market. The fund won’t hold any loans for more than 30 days.

The key selling point to potential fund investors is no lockup period or long-term commitment would be enforced. Because you’d be cycling the funds once or twice a month, you can allow the fund investors to pull out with a 30-day notice, and that low commitment could make it easier to raise capital.

When compared to the pre-takeout warehouse line alternative, the main benefit of the Liquid Mortgage Fund is you’re not limited to a small number of institutional loan buyers. You can sell loans to other types of capital providers such as insurance companies, family offices, and even individual note investors. They likely won’t be as efficient as the institutional aggregators, but at least you’d have more control and flexibility.

Resources for Lenders

Many private lending firms use multiple capital structures. It’s possible you may have a bank warehouse line, manage a fund, sell loans to institutional aggregators, get some loans table funded by individuals, and also use a wholesale partner for unique loans that are outside of your wheelhouse. It’s a good idea to explore all of your options, and you can use our website as a resource to find capital providers and law firms that specialize in setting up mortgage funds.

  • Visit the Services Provider Directory
  • For the Pre-Takeout product, select Capital
    • Browse the main list, or filter by category
  • To find attorneys that can help you create a new mortgage fund, click Legal on the main Services page
    • Select the Fund Advisory category from the filters section
  • Click on each company’s profile to learn about their program, then click the green contact button to find their phone number, an email form, and a link to their website.

The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website.

View Service Providers

Wholesale Lending for Private Mortgages

Many lenders throughout the United States partner with other private lending companies to fund private mortgages for real estate investors. Some of these relationships are known as “wholesale lending,” and it’s a great way for lenders to offer more loan products to their clients.

In this article, we’ll explain how wholesale works in the private mortgage industry, how it affects real estate investors, and how to find companies that offer wholesale lending programs to private hard money lenders.

This topic is primarily for mortgage professionals, including mortgage brokers, private lenders, hard money lenders, and private mortgage capital providers. Real estate investors who use private lending to fund their deals may not care about how lenders get their capital. But if you’re curious, keep reading, and we’ll touch on how wholesale private lending affects the borrower later.

Wholesale Lending for Private Mortgages Explained

Wholesale Lending in private and hard money loans is essentially a loan originator using capital from another lender to fund the loan. The loan originator could be a mortgage broker who never uses their own capital, or it could be a private lending company that does have their own capital for most loans, but they use wholesale lending for some of their loan programs.

For the rest of this article we’ll refer to the loan originator as the “retail lender” since they are public facing and have a relationship with the borrower. They take the borrower through the entire loan process, and when the loan is ready to close, the money is wired into settlement by another company – the wholesale lender.

Although the wholesale lender doesn’t communicate with the borrower directly, they are typically involved in the loan process so they can underwrite the loan alongside the retail lender. Even after the loan is funded, the communication typically goes through the retail lender since they want to maintain and control the relationship with the borrower. The wholesale lender always services the loan, meaning they collect the payments, send notices and manage the payoff.

Terminology for Wholesale Lending

In the private mortgage industry, there are a few different terms used for wholesale lending:

  • Correspondent Lending
  • White Label Program
  • Table Funding.

In the conventional mortgage world, the terms “wholesale” and “correspondent” mean that the retail lender funds the loan with their own balance sheet and immediately sells to the secondary market. In the private hard money world, a number of companies call their wholesale lending a Correspondent Program.

You’ll also hear the term “White Label” to describe a wholesale program. This term means that the wholesale lender’s identity is hidden, so the borrower may not know that the retail lender is not using their own money to fund the loan.

Many companies prefer the term “Table Funding”, although this term is avoided by lenders in California, and we’ll explain why in a separate article.

Some people consider wholesale lending to be the same as brokering because the lender is not putting any of their own money into the loan. However, some would argue that a wholesale funded loan carries a lot more involvement and responsibility than a brokered loan.

Types of Wholesale Lenders

There are 2 types of wholesale lenders in private lending. The first is purely a capital provider that has no interest in originating loans themselves. The second type is a hybrid lender that offers both retail and wholesale lending. These are national lenders with a very large operation set up for retail lending, but they have so much capital that they start a wholesale program to generate more business. They typically create a separate entity for their wholesale division so when the loan closes, their common name is not exposed to the borrower. In addition to capital, these wholesale lenders offer technology, legal docs, processing, infrastructure and expertise which the retail lender may not have.

Pricing for Wholesale Lending

There are a few different pricing structures for wholesale private lending deals. We’ll provide 4 possible structures and will use an example of a loan priced at 10% interest plus 2 points.

  • Structure #1: The retail lender earns all the points, and the wholesale lender earns all the interest during the loan term.
    • Retail Lender: 2 points
    • Wholesale Lender: 10% interest
  • Structure #2: The retail lender earns all the points and also earns a portion of the interest payments during the loan term.
    • Retail Lender: 2 points + 1% interest
    • Wholesale Lender: 9% interest
  • Structure #3: Both the retail and wholesale lenders earn points, but the wholesale lender earns all the interest.
    • Retail Lender: 1 point
    • Wholesale Lender: 1 point + 10% interest
  • Structure #4: The retail lender splits the points and also earns some interest.
    • Retail Lender: 1 point + 1% interest
    • Wholesale Lender: 1 point + 9% interest

For those of you who are not familiar with the word “points”, it’s formally known as an origination fee. It’s the lender’s profit on the loan, charged as a percentage of the loan amount. 1 point is equal to 1 percent.

Additional Fees Besides Origination

In addition to the points, the borrower may also have to pay a separate fee for underwriting, processing and loan docs. We’ve seen this range from $500 to $3000, depending on the size and complexity of the loan. It could be one multi-purpose fee, or it could be itemized. Many times these additional fees are charged only by the wholesale lender, especially when the wholesale lender is not earning any points. This fee covers a lot of the expenses to underwrite and process a loan, which requires a number of man hours. In some cases, these fees are split with the retail lender.

How Wholesale Affects the Borrower

So how does wholesale private lending affect the borrower? Overall, wholesale lending is good for the borrower because it provides additional capital in the market, which results in more competitive pricing. Most private hard money lenders have multiple capital sources, and wholesale partnerships are one of those sources. Real estate investors may not need to be concerned about where the money is coming from, so long as they get competitive pricing and the loan is funded on schedule.

Having a loan funded with wholesale doesn’t mean the pricing will be higher than if the lender funded from their balance sheet. The wholesale lender knows their pricing has to be competitive in the market to attract both borrowers and the loan originators they partner with. And for real estate investors who think about circumventing their retail lender to get to the wholesale lender directly, it’s not worth the effort. Even if the wholesale lender offers retail lending, the pricing would not likely be lower.

Why Originators Should Use Wholesale Partnerships

There are many private hard money wholesale lending programs available to loan originators, and many of them are very easy to qualify for. The loan originator must be a mortgage professional and show a track record of loans they’ve brokered or funded. Almost all wholesale lending programs these days don’t require the originator to contribute any of their own capital to the deal, and there is no requirement in terms of loan volume. So it’s available to mortgage brokers and direct lenders.

Wholesale lending can be a great way for private hard money lenders to close more deals. Even for direct lenders who fund from their own balance sheet, wholesale partnerships can help with client retention. For example, let’s say you’re a direct lender only offering fix & flip projects in your local market, and all of these loans are funded from your own balance sheet. One of your long-time clients wants to start flipping houses in another state that you’re not willing to lend in. Instead of referring the client to another lender, you can originate those out-of-state using a wholesale program and still maintain the relationship.

A more common scenario is a real estate investor decides to hold the property as a long-term rental instead of flipping it. You can partner with a wholesale lender that offers 30-year rental loans and earn points on that deal. You can even find wholesale lending for ground-up construction loans.

How to Find Wholesale Lenders

If you’re a loan originator seeking wholesale capital sources, use our website as a resource. Our Capital Provider Directory has a Wholesale Lending sub-section.

As mentioned earlier, there are other terms used to describe Wholesale, so go through the other categories:

The capital providers pay us a monthly advertising fee to be listed, so there is no cost to make contact through our website.

Visit the Capital Directory