What is warehouse lending?
Warehouse lending is a form of short-term financing that mortgage lenders use to fund home loans.
Most lenders don’t keep enough cash on hand to cover every loan they approve. Holding that much capital would tie up their balance sheets and restrict how many mortgages they could issue.
To bridge this gap, lenders borrow from a warehouse lender—usually a large bank or financial institution. The warehouse lender provides the money to fund the mortgage at closing, with the borrower’s mortgage note pledged as collateral.
Afterward, the lender sells the loan to an investor, such as a government-sponsored enterprise or a large financial institution. The proceeds from that sale are then used to repay the warehouse line.
Warehouse lending allows lenders to fund mortgages when borrowers are ready to close and then recycle that capital once the loans are sold. This process makes it possible to keep originating new loans without holding massive cash reserves.
How warehouse lending works
A mortgage lender is ready to close a loan for a borrower but doesn’t have enough cash on-hand to fund it directly. To access capital, the lender draws on a warehouse line of credit. Here’s how it works:
Step 1: Establishing the line
The mortgage lender applies for and secures a warehouse facility (or warehouse line of credit). The bank sets requirements, called covenants, that must be met.
Step 2: Funding the loan
When a borrower’s mortgage closes, the warehouse bank wires funds directly to the settlement agent.
Step 3: Collateral
The borrower’s mortgage note is delivered to the warehouse bank or a custodian as collateral until the loan is sold.
Step 4: Sale to an investor
Once the loan is complete, the mortgage lender sells it into the secondary market, typically to Fannie Mae, Freddie Mac, a correspondent aggregator, or a large financial institution.
Step 5: Repayment
The proceeds from the loan sale repay the warehouse advance, including fees and interest. The credit line then becomes available again.
This cycle typically lasts 10 to 20 days (the dwell time) and repeats with each new loan, allowing lenders to maintain origination volume without relying solely on internal capital.
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Warehouse lending vs. self-funding
Large banks may use their own deposits to fund mortgages directly. Independent mortgage bankers and smaller lenders don’t have that kind of liquidity.
Warehouse lines bridge the gap by giving them access to cash flow when loans close and allowing them to continue originating without relying on deposits.
Benefits of warehouse lending
Warehouse lending offers several advantages for mortgage lenders:
Liquidity
Immediate access to funds without needing large reserves.
Efficiency
Funds are repaid quickly and recycled for new loans.
Scalability
Multiple loans can be funded at the same time.
Competition
Independent mortgage bankers can compete with larger institutions.
Risks of warehouse lending
While warehouse lending is a standard practice, it comes with a few key risks:
Market Delays: If loans take longer to sell, interest costs rise and credit lines stay tied up.
Cost of Funds: Lenders pay interest and per-loan fees while loans are outstanding.
Compliance: Warehouse banks require strict reporting, audits, and quality control.
Managing these risks is crucial to maintaining efficient and cost-effective warehouse operations.
Who provides warehouse lines of credit?
Warehouse facilities are usually offered by:
Large commercial banks with dedicated warehouse divisions.
Regional and community banks that support local mortgage lenders.
Specialty banks that focus mainly on warehouse lending.
Private lenders, often in niche or non-agency loan markets.
Is warehouse lending safe?
For warehouse banks, this business is considered relatively low-risk because:
Loans are short-term, often repaid in less than 20 days.
Mortgages are secured by the property itself.
Risk is spread across many loans and lenders.
The secondary market provides steady demand for qualified loans.
For mortgage lenders, safety also comes down to cost control. While warehouse lending itself is considered low-risk, lenders pay interest and per-loan fees for every day a mortgage sits on the warehouse line. If loans take longer than expected to sell, those fees accumulate, cutting into profit margins. Staying compliant and keeping dwell times short helps lenders minimize these costs and maintain a healthy return on each loan.
Key takeaways
Warehouse lending is a short-term, revolving line of credit that helps mortgage lenders fund loans before selling them.
It provides liquidity, scalability, and efficiency, especially for independent mortgage bankers and smaller institutions.
The process is straightforward—fund the loan, hold it as collateral, sell it, and repay the line.
While it carries costs and oversight requirements, warehouse lending is a stable and proven tool that supports the U.S. mortgage system.