Understanding the mortgage loan market

The mortgage business is one of the most complicated and dynamic parts of the real estate industry. Therefore, it is vital that you understand how the mortgage system works and how lenders are able to make profit.

Institutional Lenders

There is a major difference between institutional and private lenders. Institutional lenders offer loans based on the income and credit of the borrower. They have defined standards, that is followed while private lending is not regulated by the federal government.

Primary versus Secondary Market

Primary mortgage lenders “originate” loans by dealing directly with the public. Their profit comes in the form of processing fees that is charged to the borrowers. To replenish their cash reserves, primary mortgage lenders sell the mortgage notes to investors on the secondary mortgage market.

Mortgage Brokers versus Mortgage Bankers

Mortgage bankers are direct lenders who lend you their own money. Mortgage brokers are mediators who establish the link between the borrower and the lender.

Conventional Versus Non-Conventional

Borrowers these days have a couple of options such as the ‘conforming’ and ‘non-conforming’ loan.

Any loan that adheres to the Fannie Mae/Freddie Mac loan underwriting guidelines is called a conforming loan or conventional loan. They are usually low interest loans that pose less risk for its lenders. To get a conforming loan, one has to provide evidence of good credit ratings, minimum debt and sufficient funds to close the loan. This type of loan is funded only by government-sponsored enterprises.

Conversely, any loan that does not meet the predefined underwriting guidelines mentioned above and vary from lender to lender is called a Non-conforming or non-conventional loan. This type of loan will almost certainly fail to meet the bank criteria for funding due to loan amount being higher than the conforming loan limit (for mortgage loans), the lack of sufficient credit, the unorthodox nature of the use of funds, or the lack of collateral that is backing it, and are funded by private lenders or institutions.