Mortgage Loan Market

Mortgage business is an every changing and quite complicated business. If you want to make most of it, you must understand it completely that how it works and how profits are made by lenders.

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Institutional vs. Private Lenders

Institutional vs. private is the first wide category of distinction. Commercial banks, savings & loans, credit unions, mortgage banking companies, pension funds, and insurance companies come under the institutional lenders.

These lenders generally provide the loan to borrowers based on their income and credit. There are standard lending guidelines that are followed by these lenders. Individuals or small lending companies are the private lenders, which are not regulated by the federal government and do not have insured depositors.

Primary Market vs. Secondary Market

First of all, do not confuse these markets with first and second mortgages.

Primary mortgage lenders actually directly deal with the common public and they originate loans. That’s mean they directly lend the money to the borrower. These lenders aka the retail side of the business, by which lender make profits by applying loan processing fees.

These lenders generally provide loans to the consumers and then sell the mortgage loans in large packages to the investors on the secondary mortgage market to fill their cash stocks.

The largest buyers of the mortgage notes on the secondary market are: the Federal National Mortgage Association (FNMA or Fannie Mae), the Government National Mortgage Association (GNMA or Ginnie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC or Feddie Mac). Private institutions also purchase mortgage notes.

Mortgage Brokers vs. Mortgage Bankers

Some consumers assume a mortgage company as the bank from where they are borrowing money. In reality, these are not banks but mortgage bankers or mortgage brokers. They are (mortgage banker) the direct lenders. They lend you their own money and often sell the loan to the secondary mortgage market. Direct lenders or mortgage bankers sometimes hold servicing rights too.

A mortgage broker is a middleman who carries out the loan shopping and analysis for the borrower and makes a connection between borrower and lender.

Conventional vs. Non Conventional

By definition, conventional financing is a financing that is not insured or guaranteed by the federal government. Conventional financing generally falls into two categories, these are: conforming and non-conforming. The loan that adheres to the strict Fannie Mae/Freddie Mac loan underwriting guidelines is called the conforming loan. These loans are of lower risk to the lender and they offer the lower rates. There are basic requirements for conforming loans, these are:

1: Borrower must contain a minimum amount of loan.

2: Borrowers must have good credit score.

3: Borrower must have the funds to close.

Non Conforming Loan

These loans do not possess a set of standard guidelines and may vary from lender to lender. In fact, lenders change requirements for such loans time to time.

Due to the income verification of the borrower that is less than perfect, the non conforming loan is also known as the sub-prime loan. These loans are often rated as the A, B, C, and D depending on the creditworthiness of the borrower. In past ten years, the sub prime loan business has grown rapidly especially in the refinance business and with its investors.

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