Most purchasers envision their mortgage being a straightforward relationship with solely one lender: you take out the mortgage, you make the payments, and you ultimately repay the loan. The truth is that the funds that constitute your mortgage flow into a much bigger network of investors, government-sponsored organizations and financial markets, of which most homeowners are not aware.
Familiarizing yourself with this system can help you make informed decisions when buying retirement homes in The Villages and other parts of San Jose.
The Primary Mortgage Market: Where your Loan Begins
The primary mortgage market is where people go to get a mortgage from a bank, credit union or mortgage lender. That’s the easy part that everyone already knows: You apply, the lender checks your income, credit, and assets, and then he gives you the money to buy your house.
The National Association of Realtors reports that about 74 percent of recent homebuyers took out a mortgage, not paying the entire amount in cash.
What Happens After Your Loan Closes?
That is where most buyers’ knowledge ends, and the actual economics starts. The majority of lenders are not looking to keep your loan on their books for the entire 15 or 30 years. Rather, they usually resell the loan in the secondary mortgage market within a couple of months of closing.
About 75% of all home loan closings are facilitated in this way. The original lender can sell the loan and sell the money off to them, and can then use that money to fund other loans to other purchasers, instead of waiting for a decade or more for the money to be repaid.
The Role of Fannie Mae and Freddie Mac
The largest participants in this secondary market are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The government-sponsored enterprises were established by Congress to ensure steady money flow into the mortgage system in both strong and weak economies.
They buy blocks of mortgages from lenders all over the country and “package” them into what are known as mortgage-backed securities that are sold to investors, from pension funds to insurance companies and individual retirement accounts. That is why mortgage terms and pricing are similar, whether you are taking out a mortgage in San Jose, or in a small town thousands of miles away.
How Does Your Monthly Payment Actually Flow?
Although your loan is sold, you’ll generally continue sending your payments to the same company or a company that was hired by the original company to handle the loan servicing, as the original lender or an appointed servicing company has the right to collect your payment and manage your loan account. This servicer passes the principal and interest part of your payment to the investors who now de facto own a stake in your loan and retains a servicing fee for itself.
So far as you’re a homeowner, there’s nothing drastically changed. The interest rate, loan term and monthly payment amount will remain the same no matter who is the owner of your loan on the secondary market; the owner of your loan on the secondary market is the entity to which you make your monthly payment, and the secondary market lender must inform you when this changes.
Why Does This System Benefit Buyers?
For a practical reason, this entire system is in place because it enables mortgage money to continue to circulate and mortgage interest rates to be more stable and more consistent nationally than they could be otherwise. Without this system in place, a mortgage would have been much more difficult to obtain, had a much higher down payment, and had a shorter term, making monthly payments much more difficult for the average family.
The lenders of today know that they can sell a loan before the end of the day, so they are willing to offer buyers more competitive rates and terms, such as the 30-year fixed rate mortgage that has become the norm today.
What This Means for Buyers Today?
When buying a condo or single-family home within The Villages, a potential buyer considering financing options will not have to do much different in the application process, but they will want to understand the requirements for specific types of loans. Fannie Mae and Freddie Mac have their own criteria that they take into account for the type of conventional loans they buy, including debt-to-income ratio, down payment requirements and minimum credit scores, etc.
These loans, known as conforming loans, can often offer the best rates because they can be readily sold into this well-developed secondary market. Loans that do not fit within these guidelines, either by size or borrower factors will have different pricing as these are more difficult to sell to those investors.
The Bottom Line for Homebuyers
You do not need to understand mortgage-backed securities or government-sponsored enterprises to buy a home successfully, but knowing that this system exists helps explain why mortgage rates move the way they do, why certain loan programs have specific requirements, and why the lender who originates your loan may not be the one you are still paying five years from now.
An experienced local agent for The Villages retirement community and a knowledgeable loan officer can walk you through exactly which loan programs fit your specific situation, but understanding the bigger system behind the scenes gives you a more complete picture of how your home purchase is actually being financed.
Questions Worth Asking your Lender
When comparing loan options, it is worth asking your lender directly whether the loan they are offering is a conforming loan likely to be sold to Fannie Mae or Freddie Mac, or a portfolio loan the lender intends to keep on their own books. Ask who is likely to service your loan after closing and how you would be notified if that changes.
Ask how your specific credit profile and down payment amount affect the rate you are being offered, since these are the same underwriting factors that determine how easily your loan can be sold into the secondary market. A lender who can answer these questions clearly and specifically is generally a good sign that you are working with someone who understands the full financing picture, not just the paperwork required to get you to the closing table.
