How Mortgages Work – An Overview of the Markets

To better understand the process of getting a mortgage loan, you need to know how the mortgage market actually works. The mortgage market has two main parts: the primary market and the secondary market.

The Primary Market

The primary mortgage market is made up of lending institutions and banks that extend loans directly to consumers and prospective home buyers like you. Basically, if a financial institution keeps the loan that it makes to you, then it's a portfolio lender or a primary lender.

Examples of portfolio or primary lenders include credit unions, savings and loan companies, and banks. Portfolio lenders can be a little more flexible in their loan offerings and often more creative than lenders who sell their loans to the secondary market.

The Secondary Market

The secondary mortgage market is made up of institutions like Fannie Mae, Freddie Mac and others that purchase loans from primary lenders or mortgage bankers. In turn, they package these loans into mortgage-backed securities (which are like bonds) and then sell them on the world capital markets.

Before a loan can be sold, it has to be a "conforming loan." That means both the municipal and the borrower have to meet a certain quality and credit standard. Any loans that fail to meet these standards are considered "non-conforming" and are kept in the issuer's portfolio until there's sufficient buyer equity built up to sell the loan or it can be classified as "seasoned." This happens when the borrower has made on-time monthly payments for a set period of time.

Because over 60 percent of all loans are sold on the secondary market, some lenders have very particular lending standards that the borrower has to meet to make the loan conform.

How the Mortgage Loan Process Works

Mortgages are complicated and often time-consuming. Predatory lenders can take advantage of misinformed borrowers, so it's important to equip yourself with a mortgage education. Become familiar with the mortgage process, learn what's available in your market and always try to find a reliable mortgage advisor to help you through the process.

The first step to get a good mortgage is having a healthy down payment. This money can be savings, a gift from a relative or sometimes a secondary mortgage. Next, the lender will want to review your credit. If your down payment and credit scores are healthy, you should qualify for a mortgage with a low interest rate and favorable repayment terms.

Source by Ray Tolley

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