The Basics of the Mortgage Market

The mortgage market can be a complex place to do business, especially for those who don't understand its basic structure. There are three major sectors of the market; understanding them can help you better understand the gigantic industry that they compromise.

Institutional and Private Lenders

Lenders are either of the private or institutional stripe. Commercial banks, savings and loans, and credit unions are all institutional lenders. When you borrow from them, you'll be qualified according to industry guidelines, and the mortgage will be based on factors that include your credit score, income, and household expenses.

Private lenders are individuals or corporations who aren't obligated to follow federal government guidelines. Their loans are not government-insured, and they often lend money in such a way that doesn't reflect the guidelines of institutional lenders.

Primary and Secondary Markets

When you go to your bank and apply for a typical retail mortgage, you're participating in the "primary" market. The "points" you pay at closing are where the primary lender makes money.

They later sell their mortgages to investors, who make money on the interest you pay over time. These investors are part of the so-called "secondary" market.

The biggest players in this secondary market are the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac").

Conforming and Non-Conforming

Conventional loans are generally broken into two categories: "conforming" and "non-conforming." A conforming loan adheres to strict Fannie Mae/Freddie Mac loan guidelines, including an analysis of your gross income to ensure that you can pay your monthly mortgage. This reduces the risk to the lender, and allows the loan to be sold to Fannie Mae or Freddie Mac.

"Non-conforming" loans are riskier for the lender, and may carry higher interest rates for consumers. On the plus side, they often have less restrictive criteria for mortgage applicants. If you're denied a conforming loan, the relaxed requirements of the non-conforming variety may make it easier for you to obtain one.

Once you know where to begin your search for the fundamental types of mortgage loans, you can narrow down the search based on rates, fees, and what type of mortgage terms you prefer. You'll find that mortgages will no longer be a mystery.