What is warehouse lending? A plain-English guide for lenders
What warehouse lending is, how it works in mortgage banking, how it maps onto private and hard money lending, and a glossary of the warehouse terms lenders see.
Warehouse lending is short-term, revolving credit that a lender uses to fund loans until they are sold or repaid: the lender draws on a warehouse line at closing, pledges the new loan as collateral, and repays the draw when an investor buys the loan or the borrower pays it off. It was built for mortgage companies that originate loans to sell them within weeks, and it works differently for private and hard money lenders, who often hold loans to maturity.
This guide explains warehouse lending in plain English, how it maps onto private lending, and ends with a glossary of the terms you will see in a term sheet. For the practical side, requirements and costs, read our guide to the warehouse line of credit for private lenders. If you are looking at other ways to fund loans, see our warehouse line alternative page.
Key takeaways
- A warehouse line funds loans between closing and sale; the loans themselves are the collateral.
- It was designed for originate-to-sell lending, where a takeout investor buys each loan within weeks and repays the line.
- Private lenders usually originate to hold, so loans stay on the line for months, which strains aging limits and ties up capital.
- The provider funds only part of each loan (the advance rate); the lender funds the rest (the haircut) and keeps the risk.
- Learn the vocabulary below before you negotiate a facility.
What is warehouse lending in simple terms?
Warehouse lending is a revolving loan to a lender, secured by the loans it makes. Think of the "warehouse" as a holding area: closed loans sit there, financed by the line, until they move out to a buyer.
The OCC's Mortgage Banking booklet of the Comptroller's Handbook describes warehouse loans as closed mortgages awaiting sale to a secondary market investor. It says a bank normally holds a loan in the warehouse for no more than 90 days, that average time in the warehouse normally ranges from 35 to 45 days, and that while loans sit there the bank earns the spread between the loans' rates and the cost of funding the warehouse.
A warehouse line is the outside financing for that holding area. A Federal Reserve Finance and Economics Discussion Series paper lays out the cycle for non-bank mortgage companies:
- The originator closes a mortgage, funded with a draw on its warehouse line.
- The provider typically funds around 95% of the balance, so the originator has its own money in each loan.
- The loan is transferred to the warehouse lender as collateral. Since 2005 these facilities are often structured as repurchase agreements.
- The originator sells the loan to an investor, and the sale proceeds go directly to the warehouse lender, which releases the loan documents to the buyer and pays down the draw.
What is a warehouse credit facility?
A warehouse credit facility is the agreement that sets up a warehouse line: a revolving credit line, documented as a credit agreement or a master repurchase agreement, that fixes the maximum size, advance rates, loan eligibility rules, dwell limits, covenants, fees and reporting. Each draw funds one closed loan, which is pledged as collateral until it is sold or repaid.
Originate-to-sell vs. originate-to-hold: why does it matter?
It matters because a warehouse line assumes the loan will leave quickly. In originate-to-sell lending, the lender makes loans planning to sell them, and the line only has to bridge a few weeks. In originate-to-hold lending, the lender keeps the loan and collects interest until it pays off.
| Originate-to-sell (mortgage banking) | Originate-to-hold (much private lending) | |
|---|---|---|
| What happens after closing | Loan is sold to an investor | Lender keeps the loan to maturity |
| Who repays the line | The takeout investor's purchase price | The borrower's payoff, or a later sale |
| Time on the line | Weeks | Often the full loan term, months to years |
| Lender's main income | Gain on sale and fees | Interest and points |
| Fit with a warehouse line | What the product was built for | Possible, but strains aging limits and capital |
What is the role of the takeout investor?
The takeout investor is the buyer that pays off the warehouse line by purchasing the loan. In residential mortgage banking, the Fed's 2018 paper notes that the buyers today are Fannie Mae, Freddie Mac or Ginnie Mae securitizations, and the OCC booklet notes warehouse loans are typically 100% committed, or forward sold, for delivery to an investor. That commitment is what makes a warehouse line low-risk for the provider: it knows who will repay it and roughly when.
Without a reliable takeout, providers get cautious. A 2022 Federal Reserve paper on liquidity in the mortgage market found that during the 2020 stress, warehouse lenders were reluctant to finance mortgages without a guaranteed source of takeout funding and tightened the characteristics of loans eligible for their lines.
How does warehouse lending map onto private and hard money lending?
A warehouse line of credit for hard money lenders and other private lenders uses the same mechanics, but the clock is longer. A business-purpose bridge, fix-and-flip or construction loan usually has no standing takeout buyer, so it often stays on the line until the borrower repays. That changes the deal:
- Aging limits bite. A limit designed for loans sold in weeks doesn't fit a 12- to 24-month bridge loan, so private-lender facilities are structured differently and terms vary by provider.
- Capital stays tied up. The haircut on each loan sits there for the life of the loan, not a few weeks.
- The provider underwrites you harder. Without a takeout, it relies on your balance sheet, covenants and personal guarantees.
- You keep the risk. If a loan defaults, you still owe the line.
That's why many private lenders compare a warehouse line with selling or placing whole loans. See warehouse line vs. whole loan sale vs. participation, and if a line is out of reach today, funding options if you can't qualify for a warehouse line. For the basics of selling a loan, read what a whole loan sale is. And for how to get a warehouse line of credit, step by step, with every test warehouse lenders apply, see warehouse line requirements for private lenders.
Mortgage warehouse lending vs private-lender warehouse lines
Mortgage warehouse lending finances residential mortgages for the few weeks between closing and sale to an investor, often a Fannie Mae, Freddie Mac or Ginnie Mae securitization. A private-lender warehouse line finances business-purpose bridge, fix-and-flip or construction loans that often have no committed buyer, so loans stay on the line far longer and terms vary by provider.
The table sets the two side by side. The mortgage warehouse column draws on the Federal Reserve's FEDS 2018-016 paper, the OCC's Mortgage Banking booklet and one published bank program (Simmons Bank). The private-lender column is general, because warehouse financing for private lenders is negotiated facility by facility.
| Mortgage warehouse line | Private-lender warehouse line | |
|---|---|---|
| Loans financed | Newly originated residential mortgages. One bank program lists FNMA, FHLMC, FHA, VA, USDA, jumbo and non-QM loans as eligible, and bridge and construction loans as ineligible (Simmons Bank) | Business-purpose bridge, fix-and-flip, construction and sometimes rental loans; varies by provider |
| Takeout / exit | Sale to an investor; loans are typically 100% committed or forward sold (OCC), and the buyers are largely agency securitizations (Fed) | Usually the borrower's payoff or refinance, sometimes a later loan sale; often no committed takeout |
| Dwell time | A bank normally holds a loan no more than 90 days, with averages of 35 to 45 days (OCC); the Fed paper cites an industry estimate of about 15 days on the line | Often months, up to the full loan term; aging limits vary by provider |
| Typical provider | Banks and other depositories lending to non-bank mortgage companies (Fed) | Some banks, plus specialty lenders and credit funds; varies by provider |
| Eligibility | Independent mortgage lenders; one bank program sets minimum liquidity, sizes lines up to 20 times corporate liquidity and requires personal guarantees from anyone owning 10% or more (Simmons Bank) | The lender's track record, balance sheet, covenants and usually personal guarantees; varies by provider |
| Advance-rate basis | The loan balance minus a haircut (Fed); around 95% in the Fed paper, and up to 99% in one bank program (Simmons Bank) | A percentage of each eligible loan, often with leverage limits on the property; varies by provider |
If your loans fit the right-hand column, warehouse funding is one option among several. Our warehouse line alternative page compares it with having capital partners fund whole loans at closing.
Warehouse lending glossary
Advance rate. The percentage of each eligible loan the warehouse line funds. With a hypothetical 80% advance rate, a $500,000 loan supports a $400,000 draw.
Haircut. The share of the loan the line won't fund, which the lender covers with its own cash: 100% minus the advance rate. The Fed's 2018 paper describes the draw as the loan balance minus a haircut.
Dwell time / aging. How long a loan has been on the line. Facilities set aging limits, after which a loan must be paid down or removed. The Fed's 2018 paper calls this "aging risk" and notes that slow sales can bring extra charges and higher haircuts on future draws.
Takeout (takeout commitment). The purchase of a loan by an investor that repays the warehouse draw. A takeout commitment is the investor's agreement, made in advance, to buy the loan.
Sublimit. A cap within the overall facility for a particular category, such as a loan type, property type or aged loans.
Eligible collateral. Loans that meet the facility's criteria (type, lien position, loan-to-value, size, location, borrower) and can be pledged. Ineligible loans can't be funded or must come off the line.
Borrowing base. The amount the lender can draw at a given time: the value of eligible collateral times the advance rate, less any reserves, and limited by the facility size.
Wet vs. dry funding. In wet funding, the provider releases money at or before closing, before it holds the original loan documents. In dry funding, it advances only after it receives and reviews the closed loan file. Which is allowed depends on the facility and, for some loans, state law.
Bailee letter. A letter that sends the loan documents to a buyer or custodian while the warehouse lender keeps its interest in the loan, with the recipient holding them as bailee until the provider is paid. It is how a loan moves from the warehouse to a takeout investor.
Mark-to-market / margin call. The provider can revalue pledged loans. If the value times the advance rate falls below what is owed, it can make a margin call, requiring cash or more collateral. The Fed's 2018 paper notes that a margin call must usually be met within 24 hours.
Non-usage fee. A fee charged on the unused part of the facility, so the provider is paid for keeping capacity available.
Concentration limit. A cap on how much of the line can be exposed to one borrower, market, property type or loan size.
Recourse. The lender's obligation to repay the full draw regardless of how the pledged loans perform. Warehouse lines are typically recourse to the lender, and principals are often asked for a personal guarantee.
Related: how to avoid warehouse covenants, margin calls and non-usage fees.
Frequently asked questions
What is warehouse lending in mortgage banking?
It is short-term credit that mortgage companies use to fund loans between closing and sale. The loan is pledged to the warehouse lender, and the draw is repaid when a takeout investor buys the loan.
Is a warehouse line the same as a line of credit?
It is a type of revolving line of credit, but the collateral is the specific loans the lender originates, and each draw is tied to a loan that must meet the facility's eligibility rules.
Do private lenders use warehouse lines?
Some established private and hard money lenders do. Because their loans are usually held to maturity rather than sold within weeks, their facilities rely more on the lender's own balance sheet, covenants and guarantees.
What are warehouse loans?
Warehouse loans are the advances a warehouse lender makes against closed loans, or the closed loans themselves while they sit on the line. The OCC describes them as closed mortgages awaiting sale to an investor; for private lenders, they are often bridge or construction loans held until the borrower repays.
How Lender Capital fits
Lender Capital offers a different route for first-lien, business-purpose real estate loans: you submit a loan, one capital partner reviews the full file and funds the whole loan at closing, and the loan is assigned to it at closing. There is no line to draw on, no haircut and no margin call. You keep servicing and the borrower relationship, and pay a placement fee from your origination points only when a loan funds. This is general information, not legal advice; consult counsel on licensing and loan sales. You keep your points and earn a yield spread: you set the borrower's note rate, the capital partner receives its agreed rate, and the difference is yours.
See how it compares on our warehouse line alternative page, or apply as a lender.
Sources
- Office of the Comptroller of the Currency, Comptroller's Handbook: Mortgage Banking
- Kim, Laufer, Pence, Stanton and Wallace, Liquidity Crises in the Mortgage Market, Federal Reserve Board, Finance and Economics Discussion Series 2018-016
- Karen M. Pence, Liquidity in the Mortgage Market: How does the COVID-19 Crisis Compare with the Global Financial Crisis?, Federal Reserve Board, Finance and Economics Discussion Series 2022-039
Have a loan you can’t fund?
Lender Capital places whole, first-lien loans with capital partners who fund the entire loan. You pay only when it funds.
