So you are finally ready to buy your first home. As exciting as that may be, homeownership is a lot more complex than you may think. It goes beyond just saving money and getting a mortgage to buy a home. Most potential homeowners don’t realize that the secondary mortgage market plays a vital role in buying a home.
When you go to buy a home, you and your mortgage lender will do so on the primary mortgage market. But the secondary mortgage market is what happens behind the scenes. A lender will sell a large percentage of new mortgages on the secondary market, which are then turned into mortgage-backed securities. These securities are then marketed to investors in the form of hedge funds, insurance companies, and pension funds. It’s not a bad idea to have an understanding of this before considering a mortgage.
So, before we get too complicated, let’s break it down to everything you need to know about the secondary mortgage market:
Mortgage Loans Will Be Grouped and Then Sold
All mortgage loans will get grouped together with similar mortgages of the same rate. Once this grouping is done, lenders will package the group as a mortgage backed security. Secondary market intelligence software can help lenders manage their loan sales and improve performance.
These mortgage backed securities will then be sold to an investor, such as Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are the largest mortgage investors and set guidelines for loans. While these are the most common mortgage investors, mortgage backed security groups can also include jumbo loans, which are usually bought by hedge funds.
What Happens on Secondary Market When You Receive a Mortgage
A mortgage investment is when you get your mortgage through a lender or broker. Your mortgage lender has no direct engagement with your mortgage after you close, and you will make your mortgage payments to a bank. The bank to which you pay has bought the servicing rights to your loan, although they did not provide the full mortgage amount.
The amount that remains comes from an investor on the secondary market, who then pays the bank for receiving your payments. The investor also collects the interest on the loan. However, this all depends on you paying your mortgage, which is why a lower mortgage is more valuable to a bank because you will be more likely to pay it off in a timely manner.
Be Aware of Competition and Risk
Competition and risk are just parts of investing in the secondary market. There are many things that can drive risk, like if you have a low credit score. Because a low credit score qualifies you as risky, the fees you pay to the lender will be higher because it is going to be harder to attract investors.
How risky you are will also impact your mortgage rates. Your mortgage rate will be determined by how much you can afford and what the investor is willing to receive as return on investment. This is why having good credit, stable employment, and reliable credit history is critical in getting a loan to buy a home.
It goes beyond just what you can risk to lose, as there are other people involved in this transaction. This is also why it is crucial you stay within your budget and buy a house that you can realistically afford. You can use a home affordability calculator to ensure that you are staying within your means and will be able to pay off your mortgage.
Understanding the secondary mortgage market is certainly not easy, but it is important to have a solid grasp on what happens after you get a mortgage. There is a whole world with lenders and investors that you should be aware of when you are approaching homeownership, so make sure you do your research to understand everything there is to know about the secondary mortgage market.