Mortgage Warehouse Loans: What Small Business Owners Should Know
June 02, 2025 | Last Updated on: June 02, 2025
By Lee Huffman
If you operate a mortgage brokerage or small lending firm, you’ve probably encountered the concepts of warehouse loans and warehouse lending. These loans serve a very specific function in the mortgage industry—allowing you to fund new home loans before those loans are sold to investors.
That short-term gap between origination and sale can cause serious cash flow issues, especially for growing businesses. Warehouse loans help bridge that gap. They can provide the liquidity borrowers need to close more loans without tying up all your capital.
Let’s walk through what warehouse loans are, how they work, why they’re important, and how you can qualify for one.
Why Borrow a Warehouse Loan?
The main reason to use a warehouse loan is simple: to fund mortgages while waiting for those loans to be sold to a permanent investor. When mortgage bankers originate a loan, it might take a few weeks, or longer, for it to be purchased. In the meantime, you need capital to keep operating.
Warehouse loans give you access to funds so you can:
- Close new mortgage loans quickly
- Handle multiple loans at the same time
- Keep your business moving even if loan sales take time
If your real estate business is growing, or if you want to scale your loan production, warehouse loans are often essential. They’re not optional for many mortgage lenders—they’re a key part of the business model.
How the Funds Are Used
Warehouse loans are not general-purpose loans. This small business funding loan has one specific use: funding residential mortgage loans that are intended for sale on the secondary market.
Here’s how the funds are typically used:
- Cover the full loan amount at closing
- Manage cash flow between origination and sale
- Hold the loan temporarily until it is purchased by an investor
The warehouse line acts as a revolving credit line. You draw from it to fund loans, and when those loans are sold, you repay the warehouse lender. This cycle can repeat as often as your lending volume allows.
Lending Sources to Consider
There are a few main options when it comes to finding a lender for a warehouse line of credit or loan:
- Commercial banks: Many large and regional banks offer warehouse lines, particularly to established mortgage businesses.
- Credit unions: Some credit unions provide warehouse loans, though availability may be limited.
- Private lenders: These lenders can sometimes be more flexible with requirements and faster to work with.
- Specialized warehouse lenders: These companies focus specifically on warehouse financing. They understand the business model and may offer tailored services for your credit facility.
Every option comes with trade-offs. Banks might offer better pricing, but more strict qualification standards. Private lenders or specialized providers may be more adaptable but slightly more expensive, especially when it comes to loan origination fees. It often comes down to which lender best matches your size, structure, and goals.
Preparing to Apply
Qualifying for warehouse loans requires preparation. Financial institutions want to work with businesses that are stable, organized, and capable of managing a fast-moving financial process.
Start with your credit:
- A solid personal credit score (ideally mid-600s or higher) helps. Pay down revolving credit (credit cards and lines of credit), and make all payments on time. Avoid unnecessary credit inquiries or closing accounts prematurely.
- A good business credit profile also matters. Consider starting credit relationships with vendors who report to business credit bureaus like Dun & Bradstreet.
Next, get your documentation ready. Most lenders will request:
- Recent profit and loss statements for the prior year and year-to-date
- Current balance sheet showing all business debts
- The Last two years of business tax returns
- A pipeline report showing your current and expected loan activity
- A business plan (if available)
If your business is new or lacks some of these records, that doesn’t mean you’re disqualified. But the more complete and organized your materials, the better your chances.
Alternative Funding Sources
If you’re not quite ready for a warehouse loan, or if your volume is too low, you still have funding options to keep your mortgage business moving:
- Business lines of credit: These loans are useful for short-term cash needs because their funding is flexible and offers smaller minimum payments. Instead of paying down the balance each month, the minimum payment is interest-only. A business line of credit is generally insufficient for full mortgage funding since it is subject to variable interest rates.
- Peer-to-peer lending: Platforms that connect businesses with individual or institutional investors offering business help loans. These loans typically have a smaller maximum loan amount, which could be smaller than your financial need.
- Bridge loans: Temporary solutions that might be available through private lenders. Bridge loans are short-term financing options that may incur higher origination fees than a longer-term loan.
- Merchant cash advance: A payment based on future sales that is repaid as you collect money from customers. This form of financing offers underwriting that is less reliant on your credit score than traditional loans.
Some businesses also explore online lending platforms like e loans warehouse, especially in the early stages. These platforms may offer less traditional terms but can help newer lenders build experience before moving on to larger lines.
How Warehouse Loans Work in Practice
The workflow for warehouse loans usually looks like this:
- Your business performs a loan closing to originate a residential mortgage.
- You draw funds from your warehouse line to cover the loan at closing.
- The loan is held temporarily in a custodial account.
- The loan is sold to a permanent investor.
- Proceeds from the sale are used to repay the warehouse lender.
This process happens quickly and repeatedly. Some warehouse loans are paid back in as little as a week. Others may remain on the line for 30 to 60 days, depending on your investor and processing speed.
Because of the pace and volume of mortgage warehouse lending, warehouse loans require careful tracking. Missed deadlines or documentation errors can slow down the cycle or increase costs.
Important Terms to Know
When reviewing warehouse loan agreements, you’ll encounter some key terms:
- Advance rate: The percentage of the mortgage amount the warehouse lender will fund (commonly 97% to 99%).
- Haircut: The amount you must fund yourself (usually 1% to 3%).
- Interest rate: Charged on funds outstanding, often variable.
- Commitment fee: Some lenders charge a fee to maintain the credit line.
- Dwell time: The maximum number of days a loan can stay on the warehouse line.
- Repurchase agreement: A clause that may require you to buy back loans that can’t be sold.
Understanding these terms will help you evaluate different offers and stay compliant with lender expectations.
Potential Risks and Challenges
Warehouse loans offer clear benefits, but there are also risks to be aware of:
- Loan sale delays: If a loan isn’t sold quickly, you may exceed the allowed dwell time and incur extra fees.
- Investor rejections: If a buyer declines to purchase a loan, you may be forced to repurchase it.
- Operational errors: Poor tracking, documentation mistakes, or compliance issues can result in funding interruptions.
- Market changes: If the secondary mortgage market slows or interest rates shift, it could affect your ability to sell loans.
Managing these risks requires strong internal systems, experienced staff, and good communication with your warehouse lender.
The Bottom Line About Warehouse Loans
For many mortgage businesses, warehouse loans are essential. They allow you to grow without tying up all your working capital and make it possible to close loans on time, even when sales take longer than expected.
Still, they’re not the right solution for every company. If your loan volume is low or your business is still new, you may need to look at alternative financing while building up your operations.
If you’re ready to apply, take the time to compare offers, organize your records, and speak with lenders who understand the mortgage business. Whether you’re working with a bank, credit union, or a company that specializes in warehouse business loans, the right fit can make a real difference.
Frequently Asked Questions (FAQs) About Warehouse Loans
What’s the main purpose of a warehouse loan?
The main purpose of a warehouse loan is to provide short-term funding to mortgage lenders so they can originate home loans. This type of financing bridges the gap between the time a mortgage loan is closed with a borrower and when it is sold to a permanent investor in the secondary mortgage market, such as Fannie Mae, Freddie Mac, or private investors. By using warehouse lines of credit, lenders can continue funding new loans without having to wait for each loan to be sold off, thereby maintaining liquidity and supporting continuous loan production. Once the mortgage is sold, the proceeds are used to repay the warehouse line, and the cycle repeats.
How long can a loan stay in a warehouse line?
Typically 15 to 60 days. The specific limit depends on the lender.
Do I need strong credit to qualify for a warehouse loan?
Strong credit—both personal and business—is typically important when applying for a warehouse loan. Lenders want to ensure that they are partnering with financially responsible and stable mortgage originators. A solid credit profile helps demonstrate that your business can manage risk effectively and fulfill its financial obligations.
Are there warehouse loan options for smaller or newer businesses?
Some specialized or private lenders may work with newer businesses, especially if there is a strong business plan or financial backing. It may be harder to qualify with traditional banks.
What happens if I can’t sell a loan on time?
You may have to pay fees, extend the loan at a higher rate, or even repurchase the loan using your own funds. Timely processing and strong investor relationships help reduce this risk.
