Mortgage investors keep the mortgage market running by providing funds and guidelines for lenders to use when selling mortgages.
This constant flow of money ensures that lenders always have money to lend, giving more people the opportunity to get a mortgage.
How The Mortgage Markets Work
When you get a mortgage, you’re primarily working with a mortgage lender. You apply for a loan, and after you’re approved, the lender will loan you the money to buy a home or refinance. 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 that 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 to buy a house or refinance.
Instead, the lender can sell the loan to a mortgage 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.
Investor Guidelines Can Determine Your Loan Type
When you apply for a mortgage, the guidelines set by the investor play a role in what types of loans you can get. Investors will only buy a loan from a lender if the loan meets the investor’s requirements. These include eligibility requirements like credit scores, debt-to-income ratio and property type. The investor could also require mortgage insurance to protect against the loan going into default if you don’t make your payments.
After you close the loan, the lender will sell your loan to an investor, but this typically doesn’t change anything for you. For example, 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 mortgage-backed securities 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 than selling to an investor. Quicken Loans services 99% of its home loans, which means you can expect the same great customer service after you close your loan.
Each investor has its own requirements, so knowing the types of investors can help you understand what types of loans you are eligible for.
Types Of Mortgage Investors
There are two types of mortgage investors:
- Government-sponsored entities, like Fannie Mae and Freddie Mac
- Government agencies, like the FHA or 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 government-sponsored entities. This means they are supervised by the government, but they aren’t a government agency like the FHA.
Fannie Mae and Freddie Mac set the borrower eligibility guidelines for conventional loans, like the 30-year fixed and 15-year fixed. They also keep cash flowing in the mortgage market by purchasing conforming loans, which are conventional loans under the maximum loan limit for the county of the house.
After buying conforming loans, Fannie Mae and Freddie Mac will package them into mortgage-backed securities and sell them to private investors. 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 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 (FHA) sets guidelines for FHA loans
- The U.S. Department of Veterans Affairs (VA) 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.
Jumbo loans are loans that exceed loan limits. They can be conventional or government-backed loans.
Because there is more risk with a bigger loan, 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 are sold directly from lenders to private investors, without involving a mortgage investor.
- 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.
Whether you’re currently a homeowner or planning to buy one, understanding how investors affect your mortgage can help you make important financial decisions.
It’s important to work with a licensed professional to review your options before making a decision about your mortgage. If you have questions about investors, how mortgages work or how to save money on your current mortgage, our Home Loan Experts are ready to help you. Speak with a Home Loan Expert by calling us at (800) 251-9080.
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