What Is A Mortgage Investor?
Investors keep the mortgage market running by providing cash flow and guidelines for lenders to use when creating mortgages. This constant flow of money ensures that lenders always have funds to lend, giving more people the opportunity to achieve homeownership. Investor guidelines can also ensure the stability of the mortgage industry.
Let’s take a closer look at what mortgage investors are, why they’re important and how they can affect your mortgage.
Mortgage Investors: What Are They?
A mortgage investor is an entity or individual that purchases mortgages from lenders. Usually, an investor is a government-sponsored enterprise (GSE), such as Fannie Mae or Freddie Mac, but sometimes private investors can purchase specific types of mortgages through brokers or investment companies.
How Does Mortgage Investing Work?
When you go through the mortgage process, you’re primarily working with a lender. You apply for a loan, and after you’re approved, the lender will loan you the money to buy a home or refinance your existing mortgage. You’ll pay back the home loan, with interest, until it is paid off.
This transaction between you and your lender happens in the primary mortgage market. It connects people who want to get a mortgage with lenders that can provide it. However, if the lender had to rely solely on receiving mortgage payments each month, it wouldn’t have enough funds on hand to loan other people money for purchasing or refinancing a home.
Instead, the lender can sell the mortgage loan to an investor on the secondary mortgage market. After the lender sells the loan to a mortgage investor, the lender can use the funds it receives to make more loans.
Why Are Mortgage Investors Important?
Besides providing the funds for lenders to create more loans, investors are important because they set guidelines that play a role in what types of loans you can get. Investors will only buy a loan from a lender if the loan meets their requirements.
These include eligibility requirements, like credit scores or debt-to-income (DTI) ratios, as well as the types of real estate that can be purchased with a specific type of mortgage. For instance, you usually can’t buy a second home with a government loan. The investor could also require mortgage insurance to protect against the loan going into default if you don’t make your payments.
Each investor has its own requirements, so knowing the types of investors can help you understand what types of loans you are eligible for.
Common Types Of Mortgage Investors
Now that you know how mortgage investing works, let’s review the two most common types of investors that purchase mortgages from lenders:
- Government-sponsored enterprises, like Fannie Mae and Freddie Mac
- Government agencies, like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA)
These investors will only buy loans that match their guidelines, so knowing each investor can help you understand what guidelines you need to meet to qualify for each type of loan.
Fannie Mae And Freddie Mac
Fannie Mae and Freddie Mac are GSEs. This means they’re supervised by the government, but aren’t a government agency like the FHA.
Fannie Mae and Freddie Mac set the borrower eligibility guidelines for conventional loans. They also keep cash flowing in the mortgage market by purchasing conforming loans, which are conventional loans within conforming loan limits set by the Federal Housing Finance Agency (FHFA).
After buying conforming loans, Fannie Mae and Freddie Mac will package them into mortgage-backed securities and sell them to private investors. Mortgage-backed securities (MBS) are essentially a grouping of residential mortgages sold as an investment product. As homeowners pay off their mortgages, the payments are collected and distributed to the private investors who bought the mortgage-backed securities.
Unlike government agencies, Fannie Mae and Freddie Mac don’t insure loans. This means the private investors aren’t guaranteed compensation if borrowers don’t make their loan payments. Since the investors aren’t protected, conforming loans have stricter guidelines for determining whether a borrower qualifies or not. The guidelines reduce risk by preventing lenders from using the investor’s money to make bad loans.
Some government agencies also act as mortgage investors. Like Fannie Mae and Freddie Mac, they buy loans from lenders that meet investor guidelines, then sell the loans as bonds to private investors in the secondary market.
Each government agency sets its own guidelines for lenders:
- The Federal Housing Administration sets guidelines for FHA loans.
- The U.S. Department of Veterans Affairs sets guidelines for VA loans.
- The U.S. Department of Agriculture (USDA) sets guidelines for USDA loans.
The Government National Mortgage Association, or Ginnie Mae, oversees government home loan programs and insures government-backed loans, protecting private investors in case borrowers default on their loans.
Can Mortgage Investors Purchase Jumbo Loans?
Jumbo loans are mortgages that exceed conforming loan limits. They can be conventional or government-backed loans. Because there is more risk with a bigger mortgage amount, jumbo loans tend to have stricter borrower eligibility requirements. Investors also handle them differently.
Conventional jumbo loans are usually too big to be backed by Fannie Mae or Freddie Mac. Instead, they’re sold directly from lenders to private investors, without involving a government-sponsored enterprise.
Government-backed jumbo loans, like FHA and VA jumbo loans, are handled by government agencies. These agencies will package the loans and sell them to private investors on the secondary market.
What Happens If Your Mortgage Is Bought By An Investor?
After you close the loan, your lender may sell your loan to an investor, but this typically doesn’t change anything for you. You would still make payments to the lender, or to the mortgage servicer that handles your mortgage payments. Those payments would flow to the mortgage investor, who can use them to create bonds and MBS to sell to private investors.
You would only have to change how you pay your mortgage if your loan is sold to another servicer, which is different from selling to an investor. Our friends at Rocket Mortgage® service the majority of their home loans, which means you can expect the same great client service after you close your loan.
The Bottom Line
Whether you’re currently a homeowner or first-time home buyer, understanding how investors affect your mortgage can help you make important financial decisions. And it’s always important to work with a licensed loan officer to review your options before making a decision about your mortgage.
If you are ready to start the mortgage process, apply for initial approval today.