The secondary market dictates how loans are processed and underwritten according to Fannie Mae and Freddie Mac guidelines. The borrower is never directly involved in the secondary market. The secondary market is essentially where lenders go to replenish their funds so that they may lend more to individual borrowers.
Loans from the primary market may be bought or sold in the secondary market, sometimes without the borrower’s knowledge. Any particular lender may choose to hold on to a loan; that is, they will have the loan in their portfolio and payments made on the loan go straight to them. However, a lender may also choose to sell a particular loan to another, or second, owner. When this happens, the loan may be serviced by the new owner, or the original owner may still service the loan and provide the payments to the second owner for a fee. In either case, the borrower will be informed of their new lender and told where they must send their payments if this has changed.
Selling a primary market loan on the secondary market allows lenders to replenish their funds. In this way, funds are not directly affected by the location of the primary loan. A loan in Iowa may be sold to a lender I New York, thus giving the Iowa lender more funds to lend to that region’s borrowers. This keeps loan money from accumulating in capital rich states and areas.
The secondary market is also useful because it means lenders can maintain a high-level of home lending investments, even when they do not hold a large amount of personal capital. Basically, every time a lender is able to sell a mortgage on the secondary market, they are given new money to offer to another prospective homebuyer. Thus, money for home loans is obtained by the borrowers more easily.
When it comes to getting a mortgage
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